This is an article that we ran on the MontrealAnalyst.com site three years ago. It is as valid today as then, perhaps even more so.  We updated it for this.

Montreal Analyst on true Sponsorship or why doesn’t anyone notice my undervalued stocks-they don’t move!  Today, there is true “Stock Sponsorship” for approximately 10% of stocks listed on the US and Canadian exchanges. While sponsorship is so important for the price action of stocks,  for the vast majority of stocks today, it no longer exists. Right from the start, understand that research coverage in a written report does not confirm that a stock has sponsorship. Of course, it is of great benefit to have research coverage, but that does not necessarily mean that true “sponsorship” accompanies it? It doesn’t. But true sponsorship does bring with it accompanying research and regular updates by the sponsor firm. With fewer brokerage firms and lower commission revenues to pay research analysts, the situation is now quite challenging.

In publicly traded stocks, research coverage can be one of the two most influential factors in the price of a stock, of course outside of the company’s fundamentals. But suppose investors are unaware of the fundamentals or what happens when a company loses sponsorship? No, it does not destroy the company fundamentally, but the company would probably have little chance of seeing its stock price attain its upside potential. Overall brokerage sponsorship has dropped dramatically over the last ten years. Just the narrowing of the spreads between the “bids and offers” has also dealt stock sponsorship a painful blow as it limits the amount of profit that trading desks can make. Trading desks have become focused on trading profits for themselves-not sponsorship-unless of course there is a corporate finance relationship that the brokerage house has with a particular stock……

When it occurs, a true sponsor (usually a brokerage house) is there to bring support to a stock: to recommend it to investors, to produce updated research reports, and often buy the stock through its trading desk when it comes into the market for sale which does support and prevent serious price weakness. Moreover, the sponsor generally keeps investors well informed about a company’s progress, its financials and its short and long term expectations of progress among many other important factors. It goes far beyond making a few telephone calls to sell the stock to investors. The “hop on board” psychology for a ride up (quick trade) is still there, but I can assure you, it does not translate into support for a stock. It never really does, it creates action-yes! But support? Not at all!

How many companies are traded in North America?

The number of companies trading on the various exchanges is enormous-over 15,000! And let’s not forget that each company in a sense is competing with hundreds of other companies for investors’ funds. That’s right; money invested into one stock does not go into another stock. It’s pure COMPETITION between each and every company to attract those investor dollars. The brokerage houses, despite their often poor track records will continue to steer investors into their “favorite recommendations” which are likely to lead investors over the overvalued cliff. They have done it consistently in the past, such as in the tech bubble and they will do it again. Value means little to them.So, in total, we have the stocks of 15,000 companies, each of which is competing with all the other companies for attention and investors’ funds. …..

SO WHAT PERCENTAGE RECEIVES SPONSORSHIP? ABOUT 15% AT BEST!

It may come as a surprise that only about 10% to 15% of all the traded stocks have sponsorship and that may be a far higher percentage than truly exits today. Some analysts have suggested that it may now be as low as 2% which is what we think as well. Now let’s keep in mind that we are referring to true “sponsorship” and not research reports (which are a tremendous benefit) or emails “sent out to 50,000 investors in North America and Europe.” We are speaking of sponsorship that lives and dies with a company in every aspect. Sponsorship can attract brokerage commission and corporate finance fees; there is very ugly rumor that suggests they are often the ultimate reasons behind “true sponsorship.”

SMALL CAPS ARE NOT PERMITTED AT MAJOR BROKERAGE HOUSES

The major brokerage houses generally do not permit their brokers to solicit orders for stocks that are selling at low prices such as the micro-caps (and most Juniors as well) or in most cases, those that are not followed by the brokerage houses’ vaunted research departments. That is the rule for US brokers and many Canadian brokers. Early stage or low price price, you are by yourself…….but that is where the greatest profit potential usually is.

The fact that a company is exceptionally undervalued and may even hold more in cash than the stock is selling at means nothing. It should, but judging by the track records of the large brokerage houses’ official recommendations, they do not want any “independent brokers” who are capable of finding excellent undervalued stocks competing with their own choices. And generally they will not allow independent research ideas-or independent brokers who do their own research since so many have learned (first hand) that their brokerage house research can be untimely garbage.  That is the reason that small companies must address the investing public with informative research reports and not expect much from brokerage houses.

THE CORRECT APPROACH IS?

Simply stated, there is no one correct approach, several methods may or may not work. But one thing is certain: Investors truly need a thorough and informative analysis of a company that the average investor can understand.  With just a research report, a company might be very surprised at the success that it has in attracting both institutional and private investors. The maximum length should be approximately three to four pages. No hype, touting, hyperbole and other nonsense; if a company is undervalued, it will eventually be recognized. But sometimes it may demand the patience of ten men. You have to live with that fact!