MidtownGuy wrote: Now that PYR is uplisted, there's greater hope of analyst coverage (though plenty of firms on the Venture exchange are covered as well). On average, after the initiation of coverage, companies experience an increase in liquidity, institutional ownership, and further analysts covering.
So a couple thoughts toward understanding the potential for PYR’s analyst coverage...
It PYR doesn’t get analyst coverage soon, it’s not that big a deal.
Why?
Because at any time, between 35% and 60% of publicly traded companies have no coverage.
That’s right, sometimes the majority of listed companies are not covered, at all. And why is that?
Mostly because of demand.
There are 1600 companies, give or take, on the TSX, and just as many on the Venture exchange (many of whom are covered). There’s simply too many companies to cover, and an analyst has only so much time.
As an example, Mackie Research, who did PYR’s bought deal, covers 70 companies. That’s it. So that’s around 4% of TSX list companies, or 2% of TSX plus TSXV.
Most individual analysts cover less than 15 companies, many less than 10.
So for an analyst to consider covering PYR, they’d likely have to choose to drop one of their currently covered companies. Not an easy choice.
Who covers? Understanding the types of coverage.
1. Buy-side
The in-house analysts for hedge funds and large institutional investors such as pension funds. Highly competent and qualified, with tremendous resources at their disposal, their information generally never sees public light, and therefore you never hear or see their names associated with any publicly listed company.
2. Major Sell-Side.
These folk work for the investment banks, trading houses, schedule 1 banks (domestic Canadian banks), schedule 2 banks (subsidiaries of foreign banks), and some schedule 3 (foreign banks with areas of restriction), and are the ones you read about and who’s names appear in press coverage. But there’s sorta two kinds of sell-side analysts, and that’s a semi-important distinction:
A/ the names that you most often see listed on a public company’s “analysts who cover us” section of the web site. Often you’ll see these names repeatedly across the spectrum of companies within an industry, but that doesn’t tell the whole story, because there are also…
B/ analysts who cover a company, but do not affix a price target, so usually aren’t listed as covering that company. They will do the research, the financial modeling, and assessment of a company’s potential, but with that information for internal use or for top institutional clients, and for a variety of reasons they won’t release a price target – they feel the company is too early stage; there’s not enough specific market competition to merit a full comparative approach; or they’re not sure yet. In other words, a company may in fact have a top sell-side analyst conducting coverage, but it’s never made known.
3. Minor Sell-Side.
These are the small shops, more brokerage than investment bank. They do wealth management and financial planning, handle smaller underwriting deals, but avoid large and complex transactions.
4. Bucket shops.
These are the small brokerages that have poor reputations, either for the poor quality of their coverage, or because they are “front-runners” – firms that take a financial position in the companies they cover (either the company does, or the individual management does separately; both are illegal but hard to police), and promote the heck out of them or make personal trades prior to large-block institutional trades that they know will move the needle.
Legal note: I make no specific declarations that they exist, and I won’t say who I think these shops are if they do. ;) (FYI, “Bucket shop” is a derogatory term widely used in the financial community; it’s based on the historical practice of people draining – into buckets – the leftover beer at the bottom of kegs tossed out by bars, then selling what they can get. So in finance, it’s a low-class, pseudo-broker-bank that is a bottom-feeder, profiting from small companies too small for the big firms.)
5. Paid Research.
Paid research gets a bad rap. By nature it’s highly promotional and – because they’re being paid by the company to say nice things – is essentially obliged to be positive. While the price targets should be accepted cautiously, the research itself, especially if you’re looking for more due diligence on the company, can be quite good.
I’m personally against paid research as it’s usually not transparent enough. But, in terms of quality, some studies show that the bias, accuracy, and ability to distinguish favourable future performance compares positively to sell-side analysts, with the authors of one-study stating they failed to find significant differences in the quality of paid-for analyst research:
https://www.accountingweb.com/aa/auditing/new-study-paid-for-analyst-reports-can-benefit-investors
Believe it or not, in the US, various SEC advisory committees have more than once made the recommendation that – because “research is such an essential component of the capital market ecosystem – companies without coverage (of which there are many) should in fact consider paid-for research, despite the long-held perception of inherent conflict of interest. They further suggest there may come a time when all research would be paid for, to benefit companies with greater exposure, to benefit investors with more investment information, and to improve market transparency against the current “soft money” analyst coverage approach, where that same company ends up being paid anyway with commissions from underwriting deals.
https://meridian.allenpress.com/accounting-review/article-abstract/89/3/903/127358/Worth-the-Hype-The-Relevance-of-Paid-For-Analyst?redirectedFrom=fulltext
https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-market-structure-subcommittee-investment-research.pdf
At minimum, if you’re going to read paid-for research as part of your D&D, keep in mind that the more unbiased the better, so look for fee-based research firms with ex ante policies – acknowledging either that their price targets are predictions and outcomes can’t be known for certain, that they also show track record of future performance and compare it to price predictions, or that they do not take a financial stake in the companies they are researching – thereby reducing potential conflicts of interest.
To truly discern paid vs sell-side broker dealer coverage, look at the fine print disclosures at the end of the report -- by law it has to state whether it's paid for or not. If it doesn’t have the IIROC disclosures, it’s been paid for.
Who might cover PYR.
Given Mackie did the recent bought deal, it’s fair to assume they will initiate coverage. They would have to be cautious about instituting coverage too quickly, as by law the issuance and coverage are supposed to be completely separate and unrelated; disclosures on research will generally say that no part of analyst coverage is connected to the benefit from handling the issuance.
Of course by practice, Mackie will very likely provide coverage, but may be second out of the gate so as not to appear too brazen.
With no offence to Mackie anyway, investors would want higher-level coverage over time, from firms with more ranked analysts and better corporate relationships, who are better capitalized and work better with large banks, as those relationships are key. Analysts at more respected and highly ranked firms have more impact on institutional buyers.
Below is an alphabetical list of a chunk of the small cap coverage companies. While these are in no particular order, for me Canancord, Cormark, BMO, RBC, and Scotia would be tops on my list: BMO, RBC, and Scotia for scale, and Cormark, Cannacord and GMP for analyst reputation and ranking:
Acumen Capital
AltaCorp Capital
Beacon Securities
BMO
Cannacord
Capital One
CIBC World Markets
Cormark
Desjardins Securities
Eight Capital
GMP
Industrial Alliance
Laurentian Bank Securities
National Bank Financial
Macquarie Bank
Paradigm Capital
Peters & CO.
PI Financial
Raymond James
Scotia Capital
TD Securities
Veritas Investment Research
(Side note: on an earlier post I noticed I called PYR a “mid-cap” company. They definitely are not that; they are a small cap. While the definitions vary widely, and while some TSX docs list small/medium/large caps as under-$500MM / $500MM-$1Bn / $1Bn, the more accepted practice at least among analysts is $250MM-$1.5 or 2Bn / $2Bn-$10Bn / $10Bn+. Again though, this definition changes firm to firm. By most definitions, PYR is a small cap.)
What entices analysts to cover a company?
Certainly a company’s fundamentals (sales, revenue, management team, history, etc.) hold attraction, but just as important are the following:
Those with a likely need for financing:
Sad but true, and investment banks will deny it (or say “no comment”), but coverage is most often initiated because the bank sees the likelihood of the company requiring future investment banking help on a financing / share issuance, and want to be in the mix. Quid pro quo, in other words.
Interest from institutional customers and clients:
Major investors will inquire about and even request that their investment banks start covering a company.
Volume:
Related to both of the above points, analysts are attracted to companies that have increasing trading volume. Volume means a lot of trades, and lots of trades means an investment bank can make more commissions with their institutional clients. Higher trading volume also indicates greater interest, a rising share price, and the potential for the need for more investment banking services.
Complementary to major players:
Analysts from major firms cover many or most of the companies on the S&P composite index. If a new company can position themselves as a potential competitor or partner to those firms, it can encourage analyst interest.
Hot / sexier sectors:
Coverage is more likely to occur in hotter industries and sectors with more volatility. This changes all the time, but perhaps is key to understanding why PYR applied to be TSX listed under the “technology” category, which shows no signs of not being hot.
Simplicity:
Analysts prefer a simple story to a complicated one. For instance, companies in the conglomerates sector get less coverage (comparatively) because they are hard for a specialist analyst to understand and/or even devote the amount of time needed to research a multitude of business divisions. Simpler companies are also easier to explain to institutional investors, which is where investment banks make their day-to-day money (in large block trades to institutions). Peter has made it known that he is trying to simplify PYR, and he’s made a concerted effort lately to simplify how he explains the company. The company’s corporate positioning has been evolving in turn, and is lately focused on “GHG reduction”. It also helps to explain why spinoffs exist (HPQ) and likely more are coming in the not-too-distant future.