- The paper Are Analyst Trade Ideas Valuable?, led by researchers at Ohio State, isolates a data set of “trade ideas” and looks at their impact – research reports that have a specific “tactical” buy/sell call on a shorter-term investment horizon, sometimes in an opposite direction of their rating. These trade ideas have almost twice the stated value to the buy-side of buy/sell recommendations according to a cited buy-side survey, and the researchers show these ideas are associated with monthly alpha of about 90bps (not including transaction costs) on buys, and even larger on sells. Further, researchers prove that institutions using trading data, in particular the clients of the broker issuing the call, do make trades on the information, though a significant impact on volume is only seen on the day of and the day after the recommendation.
So, how to become a positive trade idea? Keep in mind that most brokers intend trading ideas to be short-term (generally 4-8 week periods), so it’s possible that becoming a trade idea only increases short-term churn, so it may not be the most worthwhile goal. Also, as you might guess, the research team points out that trade ideas tend to come from stocks that have produced larger trading commissions for a broker in the past…of course, it’s easier for the analyst to call clients that have traded a particular security and are already familiar with it. However, to lower the barriers for analysts, a trade idea needs a catalyst – and 58% of these trade ideas cite “other firm news” beyond upcoming earnings or conferences. Shaping your story into a catalyst is part and parcel of the IR role – and a good starting point might be reviewing your upcoming releases with your PR team to make these stories fit to themes that can serve as such a catalyst.
- Okay, maybe this doesn’t belong under IR best practices, but according to this WSJ piece we’ve finally found an answer for how to instantly build liquidity in your stock. The Impact of TV Ads on Stock Trading highlights research from Cornell and Hong Kong University of Science & Technology to show the answer to this ages-old conundrum: call up your marketing department, then simply run huge amounts of TV advertising, preferably in prime-time – each dollar of TV advertising spend on average generates a full 40 cents of trading activity in the associated stock!
Well, you said you wanted the answer…it’s not our fault that the ROI doesn’t clear your hurdles. Either way, the researchers point out that both Google searches as well as SEC EDGAR searches for specific companies show increases immediately after TV ads air in relevant regions (based on EST and PST airings), adding to the causal relationship for the increased liquidity. We’re presenting this not entirely facetiously, though, as it does touch on the overlap between the company’s brand and retail investment – there are plenty of consumer companies, in particular, for which the audience is both customer and investor. This research claims that while the value of growing the brand to the market for a stock may not be as easy to quantify, it’s not zero, and impact of influencing that audience may be found in more than just new product sales.