How smaller companies can lure investors, and the need to stand out from the crowd
To attract a mate, peacocks perform an elaborate love dance. They strut, fan out their tail feathers and shake their shimmering green, gold and blue plumage. Under-followed and neglected micro-cap and small-cap firms trying to lure investors can take a lesson or two from peacocks. Here’s how it translates: break the routine, reach out, display something unique, and the target investor might be impressed.
Companies hovering around the $1 bn market cap face a ‘big hurdle’, says Adrian Rusling, a partner at Phoenix IR in Brussels. ‘There are a small number of specialists out there digging around for the next Microsoft, but most institutions are not looking at companies under $1 bn.’
Those at the lower end of the capitalization spectrum first need a ‘reality check’ to ensure they have a compelling story, an angle and a decent performance put together before going out and seeking investors, Rusling adds.
So if a company feels it is ready, what’s the next step? Like their animal kingdom counterparts, smaller public companies can use a splash of color to differentiate themselves from the general market scrum. Investor relations experts say it takes attitude, savvy communication and a laser-sharp focus on the right financial audiences. Here are some of their suggestions.
Provide information like the big companies
It’s not enough for a company to have a website with an investor section; your site must fulfill the needs of professional investors. That means earnings webcasts must be available for playback on the investor’s schedule, critical financial background – earnings releases, conference presentations, SEC filings, management bios – must be posted, and the company’s key investment merits, value proposition and messages must be reinforced. ‘If you want to play with the big boys, you have to look like the big boys,’ says Tom Laughran, who leads Fleishman-Hillard’s Chicago IR practice.
Target the right investor groups
Lots of mainstream fund managers invest in micro-cap and small-cap companies – the key is finding the right ones. Paul Liberty, vice president for corporate affairs and IR at Virginia-based tech company GTSI, researches investors in companies of comparable size. He’d research pure-play competitors, too – if there were any. ‘We get to know investors’ buying interests and patterns and we keep them up to date to the point that when they’re comfortable, they’ll buy in,’ he says.
Many small hedge funds and private investments in public equity funds are interested in small or micro-cap firms, and the funds and managers are relatively easy to identify, according to Bill Luckman, director of Belmont Partners, a consultancy specializing in reverse mergers. Contact is critical, however. Luckman suggests talking to as many people as possible who cover the relevant industry space or specialize in smaller-company investments.
Michael Cohn, chief investment strategist at Atlantis Asset Management in New York, suggests targeting exchange-traded funds (ETFs) that cover your industry and contacting each ETF portfolio manager directly. ‘The portfolio manager is literally the buyer of the stock, and he is investing hundreds of millions of dollars to represent his industry,’ he says.
Many ETF stock portfolios are weighted by capitalization. ‘If an ETF has $200 mn to $300 mn to invest, it is not unusual to have 1 percent of assets to devote to a very small-cap company,’ Cohn says.
Work for the future
Others suggest approaching analysts and fund managers even if they can’t take a position immediately. Offering a different perspective might be useful, and as a result, the company might be included in a commentary roundup. Ask analysts for opinions on other influencers and information providers. The payoff from these conversations might not be immediate, ‘but the person who sits at Fidelity today managing a portfolio might be running his own money somewhere else in two years’, says Beverly Jedynak, president of Chicago IR and PR firm Martin E Janis & Co.
Rusling says European companies have a longer-term outlook, so it takes more than one meeting to persuade fund managers and keep them up to date. Once invested in, however, those funds tend to hold stocks over longer periods.
Target existing shareholders
There’s a whole class of people who are already sold on your company: existing shareholders. ‘They can be invaluable, but so many companies just choose not to think about them,’ observes Jedynak.
Shareholders have personal and professional networks, which can be valuable resources. ‘Instead of trying to do it all yourself, get those 500 shareholders to get excited about the stock,’ says Luckman. ‘They’ve already bought the story. These people put their hard-earned money into your company. You need to communicate with them.’
CEO emails can be forwarded to friends; ‘Shareholders are viral,’ Luckman says.
A little PR goes a long way
Self-promotion works. ‘If a company is solid but has really good numbers and is just undiscovered, it really needs to go out and introduce itself,’ observes Jedynak.
That means doing PR – touting the company’s products and management through targeted media relations, speaking opportunities and other innovative methods. ‘You’ve got to find something that makes your company different,’ says long-time New York financial public relations consultant Irving Straus.
Plenty of investors are receptive, Luckman says. He points to the millions of online brokerage trading accounts whose owners are swayed not by brokers but by chat rooms, online news sources and traditional business publications.
Be selective about hiring outside services
Smaller companies are bombarded with pitches for IR services, and not all may be effective. Paid-for online interviews can have a place in the mix, ‘but they can be very costly and the downside is that most investors frankly don’t trust them,’ Jedynak says. It’s good practice for the CEO, however, and the interview can be publicized when it runs.
Many micro-cap firms without analyst coverage commission research reports, which can cost $5,000 or more. The quality of these reports can be inconsistent, but institutional investors do use good ones and companies can distribute them to investor audiences. For a fee, Dun & Bradstreet will list a company within its coverage space, and the additional attention gained through the listing can be helpful.
Wait until you’re ready
Time your entry. ‘If you have horrible fundamentals, or if you have a horrible situation you’re cleaning up, you’re probably better off not going out unless you have made the turnaround,’ Jedynak says. After all, who wants to attract short-sellers?
When the business is performing, the investment story must be compelling. Wall Street money is smart and will gravitate to the best investment options. ‘If the CEO is running a good business with a good business plan, good growth and good fundamentals, and the CEO is committed to developing a shareholder base, it’s going to be a successful stock,’ Luckman says.
The CEO also needs to stay committed to the IR effort. ‘CEOs dedicated to developing their shareholder base have a much higher chance of success,’ says Luckman. ‘The CEO has got to be 110 percent committed to telling his story every chance he gets and to every person he meets. IR must be the CEO’s left hand if the company’s COO or CFO is the right.’
