Research Note

Decline Continues for Analyst Coverage of Small Cap Companies
By: Robert Davis

Investors have seen a significant decline in aggregate analyst coverage over the last four months, since the end of August 2001. The study by JM Dutton analyst Robert Davis was based on data supplied by the MultexNet website.

· On August 23, 2001 when our research study was first carried out, 4,763 stocks had analyst coverage from brokerage or independent firms. At that time, analysts at these independent and brokerage firms had recently issued a total of 28,121 earnings estimates for these 4,763 individual stocks, resulting in an average of 5.9 earnings estimates for each stock covered.

· A significant coverage decline occurred since August. As of December 24, only 4,501 stocks now have research coverage - 262 stocks (or 5.5% of those stocks previously covered) had coverage terminated during this period. This reduction in coverage was even more serious, as the analyst community now has only 27,191 earnings estimates outstanding - a decline of 930 earnings estimates (3.3%).

· The decline has been most severe for the many companies below $100 million market cap traded on the AMEX, NASDAQ and Bulletin Board markets. Of the 262 stocks that have lost all research coverage, two thirds of them, or 174, have market caps below $100 million, and almost half of them are trading below $5.00 a share.

· The hardest hit market capitalization segment was $50 to $75 million, where the decline in analyst coverage was to only 41% of this group, down from 51% just 4 months previous.

This certainly represents a serious decline in the amount of information available to investors, especially with respect to small-caps. The following table provides the decline of analyst coverage by market capitalization.

Why has this happened? It is likely that the events of September 11 have had some impact on the amount of research coverage now available. However, this reduction is undoubtedly largely in response to longer-term trends. The small cap companies generate disproportionately less commissions and investment banking fees for brokerage firms. They are most likely to be the first to be dropped for larger companies. The present economic weakness has translated into both a reduction in trading volume and in investment banking activities ' the primary sources of funding for the 'sell-side' brokerage analyst.

Will this trend continue? Frankly, we do not know, but we will continue to update this research study and will let you know whether this trend continues.

J.M.Dutton & Associates, LLC. John M. Dutton, President and Supervisory Analyst, 801 S. Figueroa, Suite 1120, Los Angeles, CA 90017 Phone (213) 929-2616, Fax (213) 896 0457 Email: [email protected] Web site: www.JMDutton.com

Information, opinions or recommendations contained in this research note are submitted solely for advisory and information purposes. The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such information and the opinions expressed are subject to change without notice. This research note is not intended as an offering or a solicitation of an offer to buy or sell the securities mentioned or discussed. Neither the Firm, its principals, nor the assigned analysts own or trade shares of any company covered. The Firm does not accept any equity compensation. Anyone may enroll a company for research coverage, which costs US $22,000 prepaid for one-year. Reports are performed on behalf of the public, and are not a service to any company. The analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests and insure independence. Please read full disclosure and other reports and notes on the Company at www.JMDutton.com.