During Market Downdrafts, Stay in front of Clients as Opposed to burying your head in the sand. There may be very few sell-side analysts today who have lived through major market downdrafts similar to those experienced in 1987, 2000 and 2008. Environments like these separate the grown ups from the kids. If you are sell-side equity research analyst at a major investment bank on Wall Street, stay in front and be visible with institutional investors. They will appreciate it. If they are not in the mood to talk, they will either not answer the phone or tell you they appreciate your call but can’t talk at the moment. Moreover, it’s probably not a great idea to tell people to back up the truck because your stocks are cheap. So what types of call should you make to your institutional clients? Here are my suggestions on how to help your clients during a market free-fall especially if moving up the Institutional Investor (II) Magazine poll is important to you and your employer.
Focus on the fundamentals of your industry and, in particular, the companies you have under coverage. The perceived cause of the market downdraft will have a disparate impact on your stocks. Discuss who will be penalized the most and the least impacted by the new environment. Least impacted may very well be the “least worst” so make sure to place everything in relative terms. Most institutional investors dislike it when sell-side analysts make valuation calls. It’s their job after all. Your role is to provide data points so they can make an informed decision. Data points aren’t limited to quantitative data which most people have access to anyway. Your value-added is to opine about the data and other information available.
For example, I used to spend a lot of time with Tony A at Moore Capital before the end of every quarter to discuss the relative impact of each company’s potential strategic move as well as their competitors. The difference between a good analyst and a great analyst, in my opinion, is the ability to assimilate a lot of information even if the data is incomplete. This is extremely important because market conditions will often dictate when you need to make a decision or comment.
Prioritize your buy rated stocks so clients know which ones are your real favorites and which ones you would place less emphasis. In today’s regulatory environment, be sure to publish a note before you do so in order to avoid getting into compliance problems. In the old days, a slight misstep would likely be ignored or possibly a slap on the wrist. Today, cross the line and you are likely to get yourself fired. Markets like these can be a gift as well. You could use market conditions as a reason to downgrade stocks you already where you already were thinking of downgrading anyway. Yes, it may look a bit hokey, but it’s a great way to re-balance your recommendations. In fact, it will give you an opportunity to let clients know which stocks you believe to have positive long-term fundamentals.
In December 1999, many telecommunications equipment analysts such as myself were nervous. Companies in our sector such as Lucent and Nortel were providing newly formed telephone companies a significant amount of vendor financing to purchase equipment. The December quarter is usually the biggest of the year and was very back-end loaded. My staff and I were pounding the pavement in search of information to confirm or deny our thesis. Unfortunately, confirmation came when Lucent pre-announced it would miss consensus estimates.
The news was released after the close of trading and I immediately received a call from Don Peterson, then CFO, but it was too late. He simply called to ease the pain and to discuss what happened. The next day, several other analysts and myself downgraded the stock. I don’t like to change my rating on stocks after the information is already widely disseminated because it was going to move big regardless so you just look stupid and uninformed. In this case, I did downgrade Lucent and told the sales force it was basically over for the stock. I was already starting to get nervous anyway and the earnings miss was just confirmation that the stock was cyclically done. It’s always better to come to the conclusion before everyone else, but sometimes you have to go with what you got and use the opportunity to get out of the way.
Get on the Morning Call. When markets are extremely volatile, you not only want to stay in front of clients, but you want to stay visible with the institutional sales force and traders so try to get on the morning call. It may be difficult because strategists and economists usually receive priority in this environment, especially at bulge bracket investment banks where you are competing with a hundred analysts. However, you will be able to get on the morning call if you have something value-added to say.
Those are but a few recommendations. As mentioned, it is best to stay visible with clients on days like we’ve had. They will appreciate it. And as a reminder, there are new regulatory minefields today so make sure you publish a note first.