Analyst Quiz: Rank the Coverage Factors

Okay, time to play the equity analyst home game. Rank the following factors in terms of their importance (from a statistical point of view) in dictating whether, and how many, equity analysts follow a stock.

  • PE ratio
  • Price-earnings growth ratio (PEG)
  • Average daily volume traded
  • Industry (i.e., whether the company is in tech, biotech, consumer, industrial, etc.)
  • Market capitalization
  • Trailing one-year share price percentage change
  • Forecast one-year share price percentage change
  • Trailing one-year sales growth
  • Forecast one-year sales growth
  • Trailing one-year earnings growth
  • Forecast one-year earnings growth
  • Having underwritten an offering within five years

For bonus points, how do you think the factor rankings have changed, if at all, in recent years?

I am boarding a plane right now, but I’ll be back later today with the perhaps surprising answers.

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  3. When Is an Analyst Not an Analyst?
  4. Making Money from Analyst Dustups
  5. Juniper Demurs on Playing Beat the Analyst

Comments

  1. anon says:

    My guess..
    # Having underwritten an offering within five years
    # Forecast one-year earnings growth
    # Trailing one-year earnings growth
    # Forecast one-year sales growth
    # Trailing one-year sales growth
    # Forecast one-year share price percentage change
    # Trailing one-year share price percentage change
    # Market capitalization
    # Industry (i.e., whether the company is in tech, biotech, consumer, industrial, etc.)
    # Price-earnings growth ratio (PEG)
    # Average daily volume traded
    # PE ratio

  2. duncan says:

    Having been a sell side analyst, I think anon has made a good effort. But I am pretty sure that market cap, volume and trailing share price change are higher ranked.
    There is a lot of pressure from clients and your desk to cover stocks that are liquid, that are big enough to be investable and that have popped onto people’s radar screens because they have gone up.
    Not to be cynical, but there is one that is missing: Need for capital. A company that looks like it needs to do a financing (at 6% commission for the underwriter) is more lucrative for a firm than a company that trades lots of shares at $0.03 per share. That isn’t supposed to have anything to do with research coverage — but the evidence says it does. Further, for big investors, a looming financing offers a ready entry point for millions of shares, without having to screw around in secondary markets buying 23,000 shares a day…

  3. Josh Stern says:

    I’ve never been a sell side analyst, but having watched a lot of small cap stocks, I’m more cynical than duncan – a small cap that is cheap and throwing off a lot of cash (so no need for a secondary or financing and not much buzz) is in serious danger of having its analyst coverage dropped, and the analysts it does have are particularly likely to lower its ratings on a whim, seemingly out of spite for mgmt. that isn’t part of their ballgame.
    I realize that selling research is a business and not a donation to the public good, so I’m more bothered that people take the analysts so seriously than about what the analysts do. But I wonder if there is an opportunity in the huge empty space between hedge funds that trade mostly liquid stocks and private equity funds that buy only slightly undervalued mid and large caps. Why not start a fund willing to build huge positions in ridiculously undervalued small caps with the flexibility to choose whether to take over the company or sell the shares depending on what the market does?

  4. Anthony says:

    For canada this is my guess:
    #1 market cap – they have to cover the majors so when a customer asks an IA for information the the IA will be able to email them a pdf.
    #2 (rewritten) Having potential to underwrite an offering within five years
    At least in Canada for most small caps #2 seems to be the rule. Lots of crappy little gas companies get good coverage because they did/will do an offering. Banks often do 50 page glossy write-ups on them and the smaller brokerages even support their stock price through prop trading.

  5. Speaking of statistics, has anybody demonstrated that the *average* analyst is better than a monkey or a random number generator at picking stocks?
    “Somebody” said that Price/Sales was important in long term returns, but I don’t see it in the list.

  6. deepak ahuja says:

    All that matters is
    1) Moat
    2) Buy growth cheaply what ever your metric
    3) ROIC > WACC