Analyst for hire
Without analyst coverage, a company is invisible, as Top Image Systems has come to realize.
Shlomo Greenberg
If you compare the behaviorof Wall Street with that of Main Street, you will find that one of the most important variables in Wall Street’s valuations is the analyst. The role of the analyst is so central in explaining a company’s situation and activity that many investment houses have been formed, which, for a fee, will allocate a company an analyst who will cover it exclusively. This is accepted practice in the US and other places too. So the question is, why should I, as an investor, buy the stock of a company because it was recommended by an analyst who got paid by the company to write about it?
First of all, one has to work on the assumption that the analyst will do his job faithfully. No doubt you’re raising your eyebrows when I say this, but this is an assumption that I, as investor, have to make. After all, the company too will find itself in an awkward position if everyone thinks that the analyst it hired sings its praises just because he got paid. I submit that today, now that market activity is controlled by the Sarbanes Oxley Act, most analysts do their job faithfully, especially if its their initial coverage of the company. “So what,” you may ask, “Could it happen that a company begins to show a profit and higher sales, its stock should fail to respond positively?” Not only could it happen, but it actually happens all the time.
Remember, for example, how many quarters NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE) wallowed in the dust, despite a continual improvement in its results? Two years after Haim Shani took over the helm at NICE, when it was trading at a fifth of the price of Verint Systems Ltd. (Nasdaq: VRNT), I wrote that this was simply absurd financially. “Verint has received an extremely high management premium from Wall Street, but NICE didn’t get anything. How can this be?” I asked back then. But that’s what happened.
Top Image Systems Ltd. (Nasdaq: TISA) for example, whose management clearly felt that it was coming out of its financial darkness into the light, has hired the services of investment house Dutton Associates. Dutton describes itself as “one of the largest issuer-paid equity firms in the US.” Dutton currently gives Top Image a target price of $4 and a “Buy” rating. The company engaged the investment house at the end of 2005, and since analyst Rafael Kapelinski has published four updates, all of which have rated Top Image “Buy”. You will now claim that this is no big deal since the company is paying Dutton which pays Kapelinksi to write a review on it, so there’s no chance that he would write anything negative about it.
The answer is that Kapelinksi can quite definitely be relied on, since aside from the Sarbanes Oxley regulations, he is one of the most talented people in the field and he didn’t always work for Dutton. In 2001 he was ranked no. 3 in the Institutional Investor Survey, but from 2001 through 2004 he was VP Equity Research at Credit Suisse First Boston. He is very well known and is in demand in various fields among them software and multimedia. It was thanks to him and the fact that I was looking for an Israeli company that is likely to develop in the future, that I started to take notice of Top Image.
Incidentally, Elron Electronic Industries Ltd. (Nasdaq: ELRN; TASE: ELRN) is another client of Dutton. It is covered by an analyst named Barry Raeburn, who rates Elron “Strong Buy.” So what? Did Dutton tell him to give positive ratings? Could it not be possible that like me, Raeburn believes the assets of this investment company are much higher than its value on the TASE? One thing that readers should understand is that in the medium and long-term, a company like Top Image will get much more attention than a company of its size and with its business capabilities would without Dutton. I know for a fact that many institutional investors follow every company that investment houses like Dutton cover. They will only enter the stock if two conditions exist. Firstly, the business revival must be an ongoing success and with improving numbers. Second, more analysts, this time from investment houses who cover the company at their own expense, must also begin coverage of the stock. There are, of course, other conditions as well, such a share price of more than $4 or $5, much higher liquidity and others, but these are less important. In the case of Top Image, if the management continues to lead as it has done over the last two years, all the chances are that extremely positive prospects lie ahead for it. Without Dutton, it will take much longer.
As a final example, take Elbit Medical Imaging (Nasdaq: EMITF; TASE: EMIT). What does it have today that it didn’t have when the stock was trading at around $4 at the beginning of 2003? Think about it seriously please. Wasn’t Hungary and the real assets there already in the picture? (True, the company hadn’t yet won the tender for the Obuda Island project). Didn’t Plaza Assets’ hotels exist back then? They did. Didn’t InSightec Image Guided Treatment Ltd. exist back then? It did and how. Didn’t Elscint Medical Investment and its subsidiaries, including Gamida-Cell Ltd. exist back then? They most certainly did. So what caused the sevenfold increase in less than five years? After all, they didn’t have a Dutton.
However, Elbit Medical Imaging has always had chairman Mordechai Zisser, while companies such as Top Image, Mind CTI Ltd. (Nasdaq: MNDO; TASE: MNDO), ClickSoftware Technologies Ltd. (Nasdaq: CKSW) do not, for better or worse. People like Zisser, Emblaze Ltd. (LSE: BLZ) CEO Eli Reifman, Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) chairman Eli Hurvitz, or NICE CEO Haim Shani (for all the differences between them) do not need the help of investment houses like Dutton in the early stages; they are men of the kind that the market follows every day.
But there are people who need Dutton and hire its services, and there are people who do not need such investment houses because they have personalities that the market follows. And then, there are those who need Dutton, and lack the personality, but nevertheless do not hire it services, and, as a result they have far less market recognition than Top Image and Elron.
Published by Globes [online], Israel business news - www.globes.co.il - on October 12, 2006
