When Wall Street stops listening

As dot-coms and tech companies struggle, analysts give up coverage of them and move on. Why do some companies lose analyst interest, and what do they do then?

Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
Margaret Kane
3 min read
What if you held a conference call and no one came?

That's becoming a problem for an increasing number of dot-coms. With stock values declining and tech news moving off the front page, Wall Street analysts have been dropping coverage of many tech companies.

The latest hit was news from Merrill Lynch Internet analyst Henry Blodget, who announced he was dropping coverage of CMGI, Webvan, LookSmart and iVillage as part of a "refocusing" of his coverage area.

Other analysts have done the same. In all, there were 106 coverage terminations by analysts through June 30, according to Marketperform.com, a Web site that tracks recommendations and performance of brokerage firms. That's compared with 75 terminations during all of 2000, said Marketperform President Eric Shkolnik.

There are many reasons why a brokerage house might drop coverage of a company. Sometimes it's a personnel change; the analyst covering the company leaves the firm or switches to a new sector, for instance.

In many cases, it's a company's financial condition that prompts an analyst to lose interest. Much has been made about the lack of "sell" ratings issued by Wall Street firms. In most cases, analysts simply decide not to follow a company anymore rather than continue to research a poorly performing stock.

Analysts also turn away from entire sectors. Wall Street is a fickle place: As interests move from one sector to another, so do analysts. There's a sound financial reason for doing that, however: The more attraction a sector draws, the more likely it is to have sharp swings in stocks, opening the potential for profits.

"The investment community tends to gravitate to opportunity," said Paul Merenbloom, vice president of investor relations at CMGI and a former sell-side equity analyst. "It's not a statement that this is no longer a good company," he said, but that there's no longer an opportunity for the brokerage house to generate business based on the stocks.

The combination of shrinking stocks prices, a declining market and passing interest has hit the tech community. And many companies have seen their coverage shrink substantially.

So what do they do when that happens?

An important step, investment relations professionals said, is to make sure that company news gets out to investors, even if it's not through the analyst conduit.

"It means we have to be much closer to the direct owners," Merenbloom said. "Organizations went through analysts to get to the owners. Now we have to get to those owners on a direct basis."

Corel has seen its coverage shrink from a dozen analysts a few years ago to two now, although the company said it expects that number to increase soon. John Hladkowicz, director of investor relations for Corel, said the company put in a lot of effort beefing up its Web site to make sure individual investors can access its financial data.

But Hladkowicz acknowledged that it's "definitely more challenging" to reach out to investors without the analyst coverage.

Of course, when a company focuses on its bottom-line performance it doesn't hurt either.

"One of the reasons why our analyst coverage dropped off was because of decline in credibility," Hladkowicz said. "The fact that we've got a couple more analysts looking to pick up coverage is a reflection of what we've done in the past 18 months, and they go hand in hand."

In fact, some said that whether Wall Street is paying attention is irrelevant, as long as a company stays focused on its goals.

"We're really focused on the value we provide to our customers--that is, advertisers--and that is the mission of our business right now. What happens to the stock and the market is very much secondary," said Kathryn Shantz, director of corporate communications at Web directory LookSmart.

"We will provide tremendous value to our shareholders if we're a viable, solid company. The only way we can do that is if we're valuable to our customers."