Analysts slated for poor knowledge of e-this and dot-that companies

By Nicholas Bryant

Thursday 20th April 2000

New economy companies are concerned the powerful broking community has little understanding of the technologies that drive dot.com companies.

In one example a tech-stock analyst raised his hand at an IT Capital briefing and asked "What is bandwidth?"

(Bandwidth is the range of frequencies occupied by a transmitted telecommunications signal - in digital systems, it is the data speed in bits per second.)

The query caused a good round of giggles but raised a more serious issue.

Questions about simple aspects of technology from the people who recommend whether investors should buy or sell technology shares are common - and that has the companies worried.

They claim many analysts do not know the basics about technology.

One fear is e-this and dot-that companies will receive investor support regardless of their real worth as analysts follow the crowd for fear of exposure for lack of knowledge.

That could mean lack of recognition for top-quality stocks wishing to grow, frequent disappointment as poor business models get exposure and inflated market conditions not backed up by strong companies.

The head of research for DF Mainland, a small broking firm which focuses on technology stocks, Bruce McKay, said his knowledge of competitors' treatment of the sector was as an afterthought left to part-time or junior analysts.

He said that was due to broking firms putting their resources where they got their revenue: stocks with high market capitalisation.

Advantage is the biggest of the few local tech-stocks with market cap of about $200 million.

Most of the others are worth less than $100 million, minnows compared with the likes of Telecom.

"The broking firms focus on what feeds them ... they probably realise they will have to develop some sort of understanding or knowledge because one day they'll wake up and it'll bite them on the bum, but the realities of today are somewhat different," Mr McKay said.

Strathmore Group executive chairman Phil Norman said local analysts were not up with the play compared with their counterparts in other markets.

"I think it's reasonable to observe that this space is not as well understood in New Zealand as elsewhere and that's a function of the maturity of our technology market," he said.

IT Capital chief executive Jeff Dittus said his company had been well served for analysis by broking house Merill Lynch but admitted part of the reason was the firm's size.

"As a large global organisation with analysts all over the world they're really good at sharing information," he said.

But despite those global offices, that relationship would probably die if Merill Lynch didn't have a lucrative preferred information provider service with IT Capital, Mr McKay said.

He said it would take a major event like Telecom deciding to float its internet arm, Xtra, and offer hundreds of millions of dollars worth of new shares to shake up the broking community.

"If that happened everything would change overnight, understanding would rise and [analysts] would look more carefully at other stocks."

Mr McKay said another downside, given how little research was done here, was the amount of money being invested offshore in similar stocks to those being offered here. "We brokers only know how to shoot ourselves in the foot 50 ways.

"You've got brokers who don't understand anything of local stocks promoting overseas products with easily accessed research on Australian or US tech stocks and in doing so they erode the size and value of their own market."

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