How to Evaluate Potential Sell-Side Analysts


The professional relationships you build are critical to your success — and many of them will last far beyond listing day. That’s illustrated by a common saying in investor relations: “You date your investment bankers, but you marry your research analysts.”

Your sell-side analysts will join every quarterly earnings call, attend many investor conferences, and may even sponsor a non-deal road show. When it comes to your relationship with your sell-side analysts, you’re in it for the long haul. 

That means it’s incredibly important to carefully select those analysts, both pre-IPO and if you consider expanding analyst coverage once your company is public. How do you ensure you select analysts who are a good fit? Keep these things in mind as you forge those long-term relationships. 

1. The analyst’s current coverage list 

First, assess the analyst’s bandwidth. Do they have time to cover your company? Avoid analysts who have reached or surpassed their coverage capacity. After all, there is little value in analysts’ buy ratings if they aren’t engaging with you and investors outside of your quarterly earnings calls. Plus, when an analyst has too long of a coverage list and is therefore inattentive, they are more likely to make mistakes and produce problematic content for investors.   

It’s also helpful to consider how often the analyst travels with the companies on their coverage list. Attending non-deal road shows together provides valuable opportunities to deepen your relationship.

2. How the analyst is compensated

Compensation may seem like an off-limits question, but it can provide valuable insight into what motivates the analyst. Research analysts should be paid based on their industry knowledge and the value of their stock ideas. However, that’s not always the case, and you deserve to know if a portion of the analyst’s compensation is tied to their buy-rated stocks outperforming hold-rated stocks.  

3. If the analyst is a good fit based on their current sector knowledge and relationships 

Make sure that the analyst is familiar with — and can speak knowledgeably about — your industry sector. In addition, ask about their best relationships on the buy side. If you are a small-cap growth investment, your analysts will ideally have strong relationships with important small-cap portfolio managers on the buy side. If the analyst only has relationships with large cap portfolio managers, they may not be a great fit for your company.  

4. The analyst’s preferred channels of communication 

Analysts’ communication preferences can vary widely, so make sure that your styles align. For example, some analysts may prefer emails over calls or face-to-face meetings, while others may call you incessantly. Take time to evaluate the potential dynamic of your communication and what will jive best with your leadership team. 

It’s also important to find out if and when analysts communicate with your investment bankers. Some simply won’t interact with them — or only do so in the presence of lawyers. So make sure to determine how often they plan to communicate with bankers and their process for interacting.  

5.  If and how the analyst uses price targets and ratings 

It’s best to understand the analyst’s research process ahead of time. So, for example, does the firm use price targets and ratings? What do the terms “buy,” “hold,” and “sell” mean for this particular firm? Ask questions to understand the nomenclature and learn if and how the analyst uses price targets. It’s also helpful to take a look at the analyst’s current buy/sell breakdown — most will have more buy recommendations than sell, but seeing that breakdown can provide insight into how the analyst uses his or her recommendations.   

6. The analyst’s internal rankings and support 

Take into account where the analyst ranks within his or her firm. Do his peers think he’s doing a good job? Does he rank within the top quartile of his department? If he’s near the bottom, he may not get as many opportunities to present as other analysts. 

Also consider if the analyst has support. While some analysts work alone, those within large research teams may have associates to help them get their jobs done. 

When evaluating sell-side analysts, take your time, and don’t be afraid to be selective. Once you have partnered with an analyst, you are with him or her for the long haul. Unless the analyst himself decides to drop coverage, there is no easy way to break up the partnership; your company can’t simply “drop” an analyst. By using these points to evaluate potential analysts, you can ensure that you will work with analysts who are a good fit for your company. 

For more tips on maintaining good analyst relationships, download our checklist, “5 Ways to Facilitate Successful Analyst Communications.”