Many smaller companies hope for the day when one of the “big bracket” Wall Street four initiate coverage on their stocks. They look forward to the attention the analyst can bring and the symbiotic relationship of a great analyst who understands the nuance of the sector and can identify the pedigree in the subsector itself. This can bring increased share price and other benefits – but it can also go wrong if the company does not perform, or the analyst doesn’t see a product trajectory the same way the company sees…it which is what happened with RMTI.
In a note to investors, Morgan Stanley ($MS) initiated coverage of Rockwell Medical ($RMTI) with an "underweight" rating where the analyst set a price target of $7.00 for the company. The analyst said he believes Rockwell's drug for patients on dialysis, Triferic, will take longer to gain a hold in the market than expected. This obviously sent shares lower. Analyst Andrew Berens said discussions with external clinicians and dialysis center visits, and a survey of nephrologists led to a "high" conviction that Triferic will have "an anemic launch."
I think Rockwell Medical was totally surprised by the analysts conclusion. It was totally counter to what the company thought about the upcoming launch, and again it has done nothing but pressure the shares. This was NOT the scenario RMTI envisioned when Morgan Stanley initiated coverage. The happy quickly turned sad.
The Tit-for-Tat of Wall Street Analyst Coverage
Let me explain how Wall Street works with regard to analyst coverage. First, we need to follow the money, which emanates from the Investment Banking departments at Morgan Stanley, JP Morgan Chase & Co ($JPM), Goldman Sachs ($GS) and other large firms. They make huge fees in investment banking, which pays for the research department and market making – both of which are loss leaders. Let me say that again: Investment banking makes all the money, and the research department is a tool to aid investment banking. Market making (where the trading desks execute trades for the house and customers) is also a break even affair, one that often loses money while trying to provide liquidity. So, the Morgan and Goldman’s of the world can be the axe in the stock, and tout this as part of the pitch to garner investment banking business from the company they are covering.
What do I think about Wall Street analyst coverage from the “big bracket” four? I think it stinks!! It's motivated by greed, and I also think the Morgan Stanley analyst will be wrong on RMTI, but he will not change his rating…even if he is wrong. Morgan will drop coverage and move on to another candidate who will pay them huge fees.
Smaller companies like RMTI ($400M) are prey for big investment banks, and the bad thing is that they get tainted by an analyst who gets his annual bonus based on how much his business unit produces at Morgan Stanley. All the while, they leave good companies in their wake. I know how it works – I’ve been on that side of the table, and it is not fun when your boss enters the picture to tell you it’s time to move the tent over to another candidate. My only suggestion is to stop leaving scorched earth behind in the form of small cap companies. You should be helping them, not looking to extract maximum cash via a bait and switch vehicle like research and Investment banking.