Addition Through Subtraction: Do Fewer Analysts Create Opportunity?
A trend we’ve been seeing in the ranks of sell-side analysts could be a boon for active managers in the small-cap space.
As shown, the number of analysts covering smaller companies—those with between $1 billion and $5 billion in market cap—has dropped by 17% since the beginning of 2008. During the same period, the ranks of those dedicated to large names with market cap greater than $100 billion has jumped by 47%.
Fewer analysts can lead to compelling opportunities being overlooked in the near term and, therefore, an advantage for investment managers willing to do their own work of scouring annual reports, building financial models, and reading the footnotes of earnings releases.
The upshot is that markets for smaller companies are even less efficient than in the past and could result in greater informational inefficiencies and future opportunities for bottom-up investors.
Past performance does not guarantee future results.
Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.
The statements and opinions expressed in this article are those of the presenter. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.
Small-cap investment strategies, which emphasize the significant growth potential of small companies, have their own unique risks and potential for rewards and may not be suitable for all investors. Small-cap securities are generally more volatile and less liquid than those of larger companies.
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Definitions: Sell-Side Analyst: is an individual who typically works for a brokerage firm and evaluates companies for future earnings growth and other investment criteria. They sometimes place recommendations on stocks or other securities, typically phrased as "buy", "sell", or "hold." Russell 3000® Index: is a market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire U.S. stock market and encompasses the 3,000 largest U.S.-traded stocks, in which the underlying companies are all incorporated in the U.S. All indices are unmanaged. It is not possible to invest directly in an index. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indices. Russell® is a trademark of the Russell Investment Group.
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