A common mistake made by new investors, and in some cases, more seasoned investors too, is predominantly focusing on sell-side research when making buy/sell/hold decisions. While it is true that published sell-side research is widely available, it is also important to remember that the presented viewpoints only represent the opinions of a single analyst (or small team). As a refresher, a sell-side research analyst’s job is to track a list of companies, generally within a single industry, and create reports for their firm’s clients. To do this, an analyst will usually construct models to project each company’s financial results as well as contact competitors, customers, and business partners who might have valuable perspectives. However, although the individuals writing these articles of research may be qualified, they still only represent one person’s — or a small team’s — analysis of a company’s fundamentals or place within its market and industry. Fortunately, sell-side research is not the only source of information for investors as they can also go straight to the source and view the relations companies have with their investors.
“Investor Relations” is the title used to describe the communications a company has with its inventors, prospective investors, media outlets, and other analysts. In fact, the majority of companies even have entire websites dedicated to investor relations. Typically, these sites contain valuable resources such as annual reports, press releases, quarterly reports, other SEC filings, and correspondence with investors. As an investor who wants to make the most informed decisions possible, using these resources to further explore a company, its strategies, and industry might be a great idea. That said, it can sometimes be hard to know where to start. Accordingly, starting with an analysis of a company’s key investors might be a good place to kick-off your research.
Knowing who the institutional investors and other major equity holders are, as well as their stake in a company, can be extremely useful. Moreover, it is not uncommon for different investors of a single company, within a specific industry, to have similar investment styles. For example, a company focused on social impact and environmental conservation is likely to attract a larger percentage of investors who look for impact investing opportunities than other companies might. As such, if you have a shared an interest or passion for impact investing you might want to consider investing in the company in question too. Keep in mind that a company’s management generally tries to build up the relationships it has with key investors, which in turn, means keeping them happy. Those who have made significant investments in a company, therefore taking on substantial risk, want management teams to make decisions regarding the company’s future that appeal to them. In many cases, the investors get what they want. Consequently, if you have similar goals and interests to the key investors of a company you have also invested in, you would likely benefit from their ability to influence its future. Ultimately, when the investor’s philosophies are aligned with those of management, projections regarding the company’s future performance are more realistic and the stock price becomes more stable (less volatile). Of course, there is no such thing as a “sure thing,” but, it is always beneficial to give yourself any advantage that you can.
Great investors never stop researching and learning more about their current portfolios as well as investments they might want to make in the future. Similarly, they strive to stay ahead of other investors and keep a competitive edge if they can. Sometimes doing so requires getting to information first, while other times it is the result of looking for information in places that others are not. Therefore, if you are currently only relying on sell-side research, perhaps further exploring investor relations is the next step that will keep you (or put you) ahead of the rest!