The Motley Fool has often spoken out against Wall Street analysts, shaking our heads at their conflicts of interest, their somewhat meaningless ratings systems, and the sometimes-questionable value they deliver to investors. We're talking here about the "sell-side" analysts who work for brokerages such as Merrill Lynch (NYSE:MER), Citigroup's (NYSE:C) Salomon Smith Barney, Morgan Stanley (NYSE:MWD), Goldman Sachs (NYSE:GS), and J.P. Morgan Chase (NYSE:JPM), delivering investment advice to company clients.
In an interesting development lately, many small and midsize firms are finding themselves without any sell-side analysts covering them. Of the 4,000-some companies followed by Reuters Research, about 666 had no analyst covering them at the beginning of this year, up from just 85 in 2002. Meanwhile, close to 1,000 firms have just one or two analysts covering them.
Why does it matter to a company? Well, having analyst coverage means you're on the investors' radar. It means that investors will hear about you when the analyst releases a report or upgrades (or -- yikes -- downgrades) you or makes any comments. Analysts can help tell your story to the world and can explain what you're up to. Coverage can help you when you want to raise more money by issuing additional shares, too.
There are several reasons for the reduction in coverage. For starters, in a not-so-hot stock market environment, many analysts have been laid off or have moved on to greener pastures in their own or other firms. According to CFO.com, many analysts are switching from covering smaller firms to joining their brethren in covering large caps, such as Microsoft (NASDAQ:MSFT) and Procter & Gamble (NYSE:PG). Large companies stand to bring more business to these investment firms, so the potential payoff is bigger.
The abandoned companies tend to be small, mostly with market caps less than $1 billion. CFO.com notes that postage meter specialist Pitney Bowes (NYSE:PBI) saw its coverage drop from 10 analysts to five between 2002 and 2004, while Comcast (NASDAQ:CMCSA) and Texas Instruments (NYSE:TXN) have seen their coverage surge.
What does this mean for investors? Well, expect to see less research available on many smaller companies. (Although we've derided analyst ratings, many analysts are smart folks who offer solid insights in their research.) Begin looking for stock recommendations and commentary elsewhere, such as here in Fooldom. We've got a suite of investing newsletters that offers picks, and our vibrant Fool discussion boards are visited by thousands of readers sharing their investing thoughts and experiences. Check them out; we offer free trials.
Longtime Fool contributor Selena Maranjian owns shares of Microsoft and Comcast.
