A few days ago, my friend Bob emailed me a link to a recent Wall Street Journal article commenting on the omega-dog behavior of brokerage house securities analysts on company conference calls. The ultimate acknowledgment of this inferior status is the obsequious “Great quarter” comment.
A distant cousin is “Thank you for taking my question,” which typically means “I know you control who gets to be heard on the call and I appreciate the status you’re granting me.” It can also convey an undertone of irritation that the analyst has been denied this opportunity on previous calls, despite his obvious stature in the industry. If so, the analyst is also implying (sometimes, to his regret) that management isn’t clever enough to pick this up.
my take on the sell side, and on earnings calls
Anyway, Bob’s email prompted me to write down these thoughts.
1. The earnings release and conference call are, in the first instance, the straightforward way that publicly traded companies feel they meet disclosure requirements mandated by regulators.
At the same time, companies understand these are marketing opportunities as well.
Of course, management controls who gets to speak on the call–and it’s virtually always favorably inclined analysts who get the air time. If you don’t believe this, read anything Mike Mayo has written about the securities industry. For the better part of two decades he was blackballed by the major banks, not because he was an incompetent (he’s quite the opposite) but because he pointed out banks’ weaknesses and recommended selling their stocks. Not only was he denied access to managements, but he was repeatedly fired from brokerage houses when firms he covered directed investment banking business elsewhere and when institutional investors who had large bank stock positions shifted their trading away.
No, being seen as the CEO’s boot-licking lapdog isn’t pretty. Looking on the bright side, though, a lapdog has unparalleled access to his master–and that access is something institutional investors are willing to pay for.
2. Securities analysts are deeply dependent on the managements of the companies they cover. Investment banking business is only part of the story. Will the CEO help an analyst burnish his reputation by attending a conference the analyst organizes or will he dispatch an IR person who will give a canned presentation that’s months old. When the CEO or CFO travels to meet large institutional investors, will they let the analyst arrange the agenda and travel with them? If the analyst has a question, will the CEO return his call? How fast? These are all factors an institutional investor considers in deciding how much he’s willing to pay an analyst for services.
Companies are also the primary source of industry information for almost every analyst. Cutting off access to management is like taking away your internet connection. That’s doubly true today when brokerage house research budgets have been pared to to bone and many laid-off analysts have been forced to open up shop on their own.
3. The traditional communication system, of which many earnings conference calls are still a part, is broken. When I was a rookie analyst, publicly listed firms would feed financial information to shareholders and interested investors through “tame” brokerage house securities analysts. Many companies regarded analysts as quasi-employees whose job was to relay the info–untouched–to shareholders. After all, everyone had to have a brokerage account.
Lots has changed since then:
–investors under the age of, say, 60 have spurned traditional brokers in favor of a do-it-yourself approach through discounters like Fidelity. Two reasons: much lower costs, and a fundamental distrust of the motives of traditional brokers. Sell side analysts still have contact with institutions, but will almost no individual investors
–Regulation FH (Fair Disclosure, August 2000) has clearly specified that the practice of selective disclosure is illegal
–many of the analysts companies communicate with no longer work for brokers. They’re in independent research boutiques that repackage the information they receive and sell it. They talk to some institutions, but not all. And they have no content whatsoever with individual investors.
The upshot of the traditional practice is that individual shareholders are cut out of the information loop altogether. Ironically, CEOs can end up giving corporate information (which is the property of shareholders) for free to professional analysts, who are typically not shareholders, while denying it to owners. To add insult to injury, these middlemen then sell the information to shareholders, who are forced to pay thousands of dollars a pop.
Yes, the “tame” analysts kowtow–but they’re laughing all the way to the bank.
The current system is so broken, I think it’s only a matter of time before there’s wholesale change. That day can’t come too soon for me.