When considering investing in micro-cap stocks investors need to be aware of the differences between “independent” research reports and what is generally referred to as “paid for” research. Both types of research can provide meaningful information on specific companies and certainly can be useful when trying to make an investment decision.
However, when you see a research report on a stock that has a disclaimer on the last page denoting the for example that $10,000 was paid to the research firm to write the report you need to know that this classifies as “paid for” research.
Understand that most of the times you see this it is because stocks with no research coverage on the street want a credible firm to write up a report for potential investors to be able to evaluate. Because of this, you need to be aware that companies paying for these research reports are generally expecting the research to come back as a Strong Buy, Buy, or Speculative Buy recommendation.
This means you will likely never find a “paid for” research report with a Neutral or Sell rating. So when you see these research reports it is best to use them as an informational piece on a particular company rather than focusing on a price target of for example $4 when the stock is currently at $1.50. Most importantly, these “paid for” research reports are great outlines of companies and can better help investors begin process of gather all information available on a company before making an investment decision.
Much different than “paid for” research independent equity research within the micro-cap sector is available if you know where to look and understand why particular research firms are willing to cover these stocks. First, an independent research analyst that picks up coverage on a micro-cap stock is generally planning on covering the name for at least 12months.
Most EPS and price targets are going to be based 12months out giving the analyst the opportunity to cover the stock through multiple quarterly reports and/or year-end reports. An analyst will start research coverage on a micro-cap if he/she believes a company has a product or service with great growth potential, enough liquidity for the institutional buyers that use their research, and management team with enough experience that the analyst believes they can execute on managements goals.
While the majority of research coverage for independent equity research is going to be a Buy or Strong Buy there is a reason for this vs. “paid for” research. Because micro-caps generally have such little liquidity, it makes very little sense to write a Sell or Sell Short report because the stocks are just too small for institutional buyside firms to care and certainly a research report of Neutral is again just not too useful for the buyside.
Of importance, when you see a micro-cap that does have independent research coverage you should understand that these reports have gone out to many institutional investors that may be making the decision to build positions in the stock. So as you are gathering all information available on a micro-cap before making an investment decision it is good to know that a stock may have institutional support and/or could end up with additional research coverage as more analysts could be analyzing the company once one firm picks up coverage.
Below is a list of independent equity research firms and firms that provide paid research. ISWR believes they are great resources for individual investors to have when compiling information on micro-caps for investment decisions:
Sidoti & Company, LLC. – www.sidoti.com ; Sidoti provides an incredible breadth of coverage on micro-caps and can be a great source for finding companies in a particular sector as Sidoti has research analyst that cover virtually every sector.
Leerink Swann – www.leerink.com ; if you are looking for coverage of micro-caps in the healthcare sector including biotech, pharma, life science, and healthcare technology you can’t do any better than Leerink for a company that is laser focused on healthcare research.
Battle Road Research – www.battleroad.com ; with absolutely no investment banking tied to research this company produces high quality tech research and covers software, hardware, and internet stocks. A unique feature they offer is their Small Cap Snapshots which can help generate ideas and may useful to individual investors when trying to compare a micro-cap in the same sector.
Redchip – www.redchip.com ; Redchip is different than many firms in that provide investor relations to micro-cap and small cap stocks as well as provide independent research coverage as well as paid for research. Additionally, with at least 4 conferences per year Redchip is always brining micro-cap stocks management in front of investors with face to face to meetings and/or presentations. Redchip is an all-around great resource in the micro-cap space.Taglich
Brothers – www.taglichbrothers.com ; similar to Redchip but Taglich has an even stronger focus on the micro-cap stock sector. Much of the research is in the paid for variety but with a good amount of equities covered you find quality reports in many sectors. Additionally, Taglich being a full service B/D has a unique view on micro-caps where they have many services to help investors understand and make decisions on these stocks where traditional B/D’s definitely shy away from micro-caps in any part of an investor’s portfolio.
Mergent – www.mergent.com/mergent-solutions/equity-research-analytics ; this multifaceted company can provide individual investors both independent equity research but also combines quant based models and massive financial databases. So if you like a micro-cap in a particular sector and are researching how these stocks have traded in the last 2-3 years for example Mergent has this information. Combine that with equity research and the quantitative models and an individual investor can possess the same tools used by many large institutional investors.