IPO Fees Create Hypersupply of Tech Analysts

| About: Northern Empire (NREB)

Ever wonder why there are so many tech analysts out there, even as the sector is puportedly beyond bubble days? In fact, according to Karen Richardson in today's WSJ (sub. required), despite a decline in overall numbers of Wall Street analysts, there has actually been an uptick in the number of tech analysts on the Street. The key reason according to Richardson is underwriting fees for IPOs:

The average number of analysts per tech stock in the S&P 500 nearly doubled to 23.53 by the end of April from 12.36 in January 1996 and was still 22% higher than the 2000-2001 average of 19.25 analysts per tech stock, according to [Francois Trahan, chief investment strategist at Bear Stearns Cos.'] report. By the first quarter of 2000 -- near the height of the Internet bubble -- the total stock market value of S&P 500 tech stocks peaked at well over $4 trillion. Today it is about $2 trillion.

A close look at Bear Stearns's data and the tally of IPOs during the past decade shows the ranks of research analysts tend to cluster around industries that yield the greatest volume of IPOs and brokerage fees -- even if the performance of stocks in those industries is poor over time[...]

Since the end of 2000, 112 high-tech companies have made IPOs of new stocks, according to data and research firm Thomson Financial, compared with 49 energy/power companies over the same period.

The hiring of analysts "is still driven to a large extent by banking business, particularly IPO volume," says Michael Mayhew of Integrity Research Associates LLC, a consulting firm in Darien, Conn., that helps money managers and investment banks get quality securities research. "Regardless of what everyone says, the profits all come from one pot," Mr. Mayhew says.

In a related vein, SeekingAlpha contributor Eddy Elfenbein noted last week that orphan stocks actually outperform their hyper-analyzed peers. He suggested looking at Northern Empire Bancshares (NREB), among others.