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.