Attracting investor attention has been a long-standing dilemma for small-cap issuers, especially due to their lower IR resources. While small-cap companies deal with inherent headwinds of liquidity constraints, lack of sell-side coverage exacerbated by MiFID II, and trading volatility, they are also inherently nimble due to their smaller size. Operating with agility and an entrepreneurial approach, many smaller companies can pivot and profit from a crisis, such as the global coronavirus pandemic, and emerge stronger. However, in many cases, their resiliency and ability to reinvent their playbook often goes unnoticed by the investment community.
Just search small-caps post COVID-19, and you’ll find article after article pointing to a market benchmarking historical cycles of small caps rebounding post a recession now poised for a long tailwind, albeit a bumpy ride ahead. With investors laser focused on more transparency during these uncertain times, active and frequent communications with the Street is imperative. As the saying goes, timing is everything, and small-cap IR teams are at a critical crossroad to harness thinking outside the box and push beyond traditional investor targeting and outreach to get noticed.
Here are four alternative strategies to capture investor mindshare.
Highlight Alpha in Your Messaging
Craft your investment thesis with the mindset of a contrarian investor. These savvy investors are stock pickers that invest contrary to the market in order to generate alpha. In the COVID-19 environment, there are plenty of stock-specific, contrarian opportunities in out-of-favor sectors poised to recover. But, how do you get noticed among this crowded, neglected-value space? Communicating a detailed and compelling turnaround roadmap can stir interest for investors to take a closer look. Align messaging to megatrends that are supported by proof points of your domain expertise and innovation that capitalizes on these long-term thematic trends. Of course, the rise of ESG investing propelled into overdrive this year. Make it a point of discussion in investor conversations instead of waiting for a question to come up. Incorporate this ESG discussion as part of regular communications with investors through quarterly earnings remarks, which can also spark investor attention. Remember investors and analysts are using AI technology and natural language processing to analyze earnings transcripts to detect management tone, emerging trends, as well as how companies are integrating ESG to mitigate risk and drive improved performance. While many small-cap stocks are just beginning their sustainability disclosure journey, proactively communicating your efforts and goals across multiple investor engagement channels puts you on the radar and may give you an edge to standout from other small caps.
Trigger Passives and Indexes
The rise of passive investor influence has dominated market structure over the last decade, with Moody’s estimating that passive investment will surpass U.S. active investing by 2021. This is a tremendous disruptor in the world of investor relations and interactions with investors. Given that passive funds – ETFs, index and quant funds – are generally among a company’s top 10 shareholders, understanding governance and proxy guidelines as well as methodologies for asset allocation are essential to staying ahead of inclusion or exclusion in a particular index, ETF or other passive investment strategy. Build relationships with the appropriate governance contacts and include ESG discussions. This creates a forum to address gaps in policies, build opportunities for better alignment and correct any inaccuracies that may exist related to governance issues. Also, we know that changes in market cap and dividend policies are large factors in reconstitution allocations. Increasing outreach and creating demand for your stock can help move the needle on market cap size and support inclusion. On the flip side, small caps will benefit from increased outreach that can provide a floor of support against increased trading pressure if dropped from an index.
Consider Your Industry Category
Something that may not be top of mind, but certainly something to consider is a company’s sector classification according to its Standard Industrial Classification (SIC) or North American Industry Classification System (NAICS) code. Being incorrectly classified can impact how a company is valued and whether it commands a higher or lower multiple within an industry. For example, a company that sells software applications to government customers is more likely to achieve a higher multiple and greater liquidity if it is classified as a software application company versus a government IT service provider. Working to make sure you’re accurately classified may take time, but it’s worth the effort and can open a new peer group that commands a higher multiple.
Harness a Pull IR Strategy and Take Control of Your Investor Marketing
The seismic shift to virtual engagement will undoubtedly continue at some level past the pandemic pandemonium. It’s obviously proven to be an efficient way to interact, but is it creating corporate access fatigue for the C-suite as well as for investors? Consider balancing virtual meetings with a pull strategy by enhancing your digital presence. Pull investors into your story by drawing their attention to more engaging formats such as a company-created fireside chat that is hosted outside a traditional conference venue. For small-cap companies with a tight budget, this is an impactful alternative to a full investor day. Consider soliciting an industry expert, financial news personality or a sell-side analyst, possibly one that you may be pursuing, to moderate. Planned well, this can be done in about an hour timeframe and is a great opportunity to control the narrative and address complex topics that may be misunderstood by the Street. Much like a capital markets event, include divisional leaders prepped in Regulation FD to discuss their operating environment and growth roadmap. Another format that dives deeper into your story is producing a well-crafted short, C-Suite video message beyond the traditional CEO or CFO format. Highlight the Chief People Officer or the Chief Marketing Officer to provide compelling digital content that pulls investors into a relationship with your corporate brand.
Undoubtedly, the waterfall of change since the pandemic hit in March has had far-reaching impact and calls for a reset to capturing investor mindshare, both active and passive. Small-cap IROs have done well in adapting to the paradigm shift to virtual communications and must continue to lean into creative, new approaches to compel heightened investor engagement and dialogue.
Hala Elsherbini, Senior Managing Director, Three Part Advisors
Hala Elsherbini leverages her 26 years of investor relations experience to guide client companies in managing comprehensive IR strategies. As a strategic advisor and trusted resource to senior leadership, she executes client engagements by harnessing clear and concise communications, message development and strategic counsel. Successful program execution includes managing ESG disclosure initiatives, direct board relations and serving as a client advocate to Wall Street through her extensive investment community network.
Hala graduated from Southern Methodist University with a B.A. in Communications, majoring in public relations. She has been a member of the National Investor Relations Institute (NIRI) since 2005, serving on various committees, both on a national and local chapter level, and served a four-year team on the NIRI National Board. She currently serves as Vice President-Professional Development of the NIRI DFW board of directors and acts as the Chapter’s Advocacy Ambassador. She also was recently recognized as a part of the NIRI 2020 Class of Fellows.
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Three Part Advisors, LLC is a leading full-service, strategic investor relations advisory firm. Through measurable and proactive investor relations programs, the firm helps its clients develop an effective strategy to communicate their investment thesis to Wall Street, which ultimately brings new investors into the stock and lowers their cost of capital. Through the recent acquisition of Halliburton Investor Relations, the combination leverages increased strategic counsel and outreach, strong financial communications and expanded expertise through award-winning graphic design services to clients. Please visit threepartadvisors.com to learn more about our service offering.
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