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Beyond Wall Street's Panama Canal

---- New Research Approaches to Empower Both Sides

David H. Talbot

Director of Healthcare, Crystal Research Associates, LLC.

There is a Pacific Ocean of micro cap stocks and privately owned companies and an Atlantic Ocean of potential investors and new online accounts, including many savvy former Wall Street clients with high standards and research coverage requirements.

The Panama Canal is currently manned by a skeleton crew --- a relative handful of investment banking firms still active in small cap space. Owing to discount commissions on anemic trading volume, Reg FD compliance, and penny stock rules, Wall Street is no longer motivated to produce extensive coverage of small stocks. Current reports are often comparatively short 10- to 15-page documents stamped out almost like fast food. They often lack the detailed analysis of company fundamentals and research content that today's hands-on investors require.

Other approaches are gaining acceptance. One leading independent research firm publishes fact-based, comprehensive, 40- to 60-page research documents compiled by senior analysts. These "eat-your-spinach" reports address a full range of investor-relevant topics that the reader can use to cross check facts and reach his or her informed investment opinion.

This is the same kind of research that many large buy-side firms and VC funds routinely generate in-house. Available to all investors at no charge, this product is designed to put micro cap investors on the same access-to-research playing field as many big funds.

Free access to high quality research is attracting tens of thousands of downloads per week to this firm's and affiliated website. Downloading a 40-60 page report implies strong interest. Meanwhile, Wall Street seems to favor a clients-only distribution model that puts their reports on institutional client desks whether they are interested or not.

A century ago, the Panama Canal was opened and caused a revolution in world commerce and trade in the ensuing decades. Today, there are many thousands of small companies seeking recognition and a huge universe of potential investors. Connecting the two related needs is a challenge that will require new research approaches and broad dissemination that web-based systems can best provide.

Industry Overview

Small cap stock investing has become a more challenging course to navigate than ever before, with the quality and breadth of Wall Street research coverage no longer sufficient.

Ocean of Small Companies

The challenges include the steadily expanding universe of micro-cap companies as well as a stream of entrepreneurs who start new businesses and form new companies. Many of these companies have historically been dependent on Wall Street for funding-something which has not changed. In fact, with most venture capital and private equity funds as well as lending institutions no longer active in the small cap space, dependence on Wall Street has grown. The backlog of potential IPOs, secondary offerings and PIPES continues to expand at a pace much faster than published research coverage can be generated.

Most investors shy away from companies that lack funding and research support, and this stigma compounds the capital shortage that plagues the sector.

Online Investors Now Rule

The U.S. retail investment community is the largest group of individual investors in the world. Many households more frequently access stock information via electronic media than ever before. Factors that have contributed to this growth include expanded use of online discount trading and greater access to financial research via the Internet.

In recent years, the biggest concentration of interest in small cap stocks has moved to retail and institutional investors online. There are roughly 17 million U.S. households with online investors. Many of them troll Seeking Alpha and related sites for ideas but are dependent on credible research coverage.

Status of Wall Street Research

It is now well recognized that the economic drivers of Wall Street research no longer support adequate coverage on small cap stocks - especially as standards of many current investors have become more demanding. Low commissions from the trading desk, a thin investment banking calendar, the departure of senior analysts through retirement and cutbacks, Reg FD and penny stock rules have collectively and steadily emasculated the system.

Wall Street research coverage of small stocks has generally devolved into relatively short 10- to 15-page Buy recommendations stamped out by banking firms. These reports put too much focus on meeting or exceeding an analyst's quarterly projections and often lack a full discussion and analysis of company fundamental that are critical to the investor in order to independently determine at stock's risk and potential reward. In today's market, Wall Street opinions on small stocks do not move the needle with most investors they way they once did.


Distribution of Wall Street reports is usually restricted to institutional clients, as is attendance at investor conferences (notwithstanding the fact that current institutional interest in small caps is limited at best).

Wall Street firms tend to guard its institutional client lists like Fort Knox, which for small cap stocks is a further detraction since today's online investors are largely shut out. "Free" Wall Street small cap research remains an oxymoron. Wall Street firms charge CEOs speaker fees to participate in their conferences and research is generally available only to commission-paying clients.

To garner the greatest benefit for both small-cap stocks and their investors, research needs to be made accessible to a broad population. This research can then serve its inherent purpose of informing investors so that they can reach an informed investment conclusion that counts the most -- their own.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.