As brokerages cut analysts, small companies lose supporters

Such analysts help alert large investors to companies or industries that offer good stocks for investment. But so many analysts have been laid off or reshuffled by Wall Street in recent months that smaller companies can have trouble getting their attention.

Some of these companies falling off the radar screens represent the next generation of technology or innovation in Silicon Valley. Such companies look back ruefully on the days when brokerage firms, flush with money, had multiple analysts seeking out investment ideas in subsectors of Internet commerce, telecommunications and wireless technology.

``Analysts are becoming fewer, they are spread thinner, and they usually don't have the opportunity to dig as deep into each company as they used to,'' said Deborah Stapleton, founder of investor and public relations firm Stapleton Communications. ``They can't be a true evangelist for a company or a product like they used to.''

Though industry totals are hard to come by, experts say the analyst shortage has several causes: The Wall Street brokerage firms that employ them are in a severe business contraction and have been shaken by a series of scandals, so they've laid off analysts by the dozens. And some companies that were once covered have gotten too small to be viable investments for large mutual funds, which are the main audience for such research.

Especially hard hit in the layoffs have been highly paid senior analysts in sectors that aren't making a lot of money for investors right now, like telecommunications or Internet commerce.

``The Internet space used to have research teams five to 10 people deep; now you are lucky if you have one person covering,'' said Chris Danne, an investor relations specialist with Blueshirt Group. Other brokerage firms used to have a half-dozen telecom-equipment sector analysts, including fiber optics, networking, wireless and wireline. ``In many cases that's down to one or two,'' said Danne

Some worry because Silicon Valley's small companies in the past have been key to pioneering the innovations that made the valley famous.

``When Apple Computer was just getting started, it had one or two analysts that were champions on its behalf,'' said Stapleton. Without such support, ``the chances of us having heard of Apple as quickly and as magnificently as we did would have been much smaller,'' she said.

Investor interest

Having an array of research coverage can help small companies go from a promising but obscure stock to one that gets to send speakers to firm-sponsored investor conferences, gets mentioned in widely read industry reports to investors, and has big news releases interpreted in brief but influential analyst missives.

All that attention translates into investor interest, boosting stock prices and trading volume, which in turn make large investors more comfortable taking the plunge on the stock. It also increases the chance the company can raise more capital from investors in the future.

Many researchers feel justified dropping small companies that were once high-flying stocks that fell to earth. Such stocks are too small, they reason, to be a good investment for the large mutual funds that are the clients of many Wall Street brokerage firms. So researchers turn their attention to larger stocks their investor clients might be able to buy now.

``It makes it really harder for the smaller companies, which have the most to lose,'' said Ellen Brook, an investor relations professional with Stapleton.

Network testing company Ixia recently lost three of the analysts that formerly researched the Calabasas company -- two to layoffs and one to a firm closing.

Merrill Lynch, for instance, stopped covering network-testing companies as a sub-segment of technology, laying off that analyst. Now, Ixia is covered by Merrill's technology generalist in Toronto -- who has more companies to track than the previous analyst.

Reshuffled coverage

Most of the other analysts still covering Ixia are brand new, due to analyst reshuffling at their firms. RBC Capital has recently announced that it will appoint its third researcher in two years to cover Ixia.

Although the company is grateful for the coverage, ``a lot of management time is spent getting the same firms back up to speed,'' said Thomas Miller, Ixia's chief financial officer.

For many small companies, the waning analyst attention comes just as they are trying to show investors that they are a sparkling gem amid the technology-market carnage.

Covad, a Santa Clara provider of fast Internet connections known as digital subscriber lines, has recently emerged from bankruptcy, and would love to tell investors that it is now a promising pick in the hard-hit sector. But only one firm, a small New York boutique investment bank, covers Covad, down from 30 at the peak in early 2000.

``We want to be able to tell our story to Wall Street by having multiple analysts,'' said Covad Chief Financial Officer Mark Richman. Instead, executives ``gotta go out and hoof it,'' talking to investors one at a time, he said.

Some small companies worry that the lost research may never come back.

That's because some brokerage firms under investigation for conflicts of interest involving their analysts may change their structure in ways that will further emphasize larger companies over smaller ones.

Analysts could start issuing research reports primarily on the largest companies in the stock market, such as Coca-Cola, Hewlett-Packard or Intel, for which their firms can make money trading huge volumes of their stock.

``The next wave of this trend is potentially scary,'' said Danne, the investor relations specialist at Blueshirt Group.

In addition to introducing small companies to potential investors, having a lot of analysts helps build cachet for a company, and can serve as a marketing tool.

Rita Medical Systems of Mountain View, which recently lost all but one of its former analysts, heard from an investor at a recent conference that one of the laid-off analysts had spoken highly of the company. Said Rita's chief financial officer, Donald Stewart, ``That was like the Good Housekeeping seal of approval.''

© 2002 San Jose Mercury News.