How small firms can stand out in the crowd

Largely, it’s an opportunity for them to remind us of their positives and obtain the support of​ ​analysts (who will usually bang the company’s drum) and investors (who will ultimately buy the shares in​ ​the market or support the company by investing new money).

Whilst some have learnt through experience not to try and rationalise their share price at any given time,​ ​many don’t and a common question is what management can to do about a share price that undervalues​ ​the company’s standing and prospects. This position is exacerbated when a seemingly newer/ less​ ​profitable/ more risky peer does seem to be receiving all the analysts’ plaudits and getting a much better​ ​rating.

The first thing to note is, contrary to the teachings of the Efficient Markets Hypothesis, the stock market​ ​is, in fact, far from perfect and often acts in an irrational or inexplicable manner. This may help explain​ ​why – as noted in this column before – all the key UK stockmarket indices are at least 15​ per cent​ higher than a​ ​year ago despite the uncertainty of both a slowing economy and Brexit. As John Maynard Keynes noted,​ ​“the market can remain irrational longer than you can remain solvent”.

It’s not easy for smaller companies to stand out from the crowd: on AIM alone, there are not far off a​ ​thousand companies all vying for the attention of a finite audience of investors, be they individuals or​ ​institutions. Whilst some companies make being a quoted business look a breeze, often that success takes​ ​time to develop and the rewards are not immediate.

Below are six key pointers that I would happily share with quoted company management teams based on​ ​my ​20 years as both broker and investor:

​1. ​Invest in investor relations

Building a following in the City takes time and effort. Set aside at least two weeks a year, usually around​ ​results, to visit existing and prospective investors. This mainly takes place in the City, however, don’t​ ​overlook the key regional centres: there are pockets of substantial capital run out of Edinburgh, Liverpool​ ​and Leeds, for example. A good corporate stockbroker will manage this process for you but work them​ ​hard to make sure you are getting exposure to new faces as well as old: a good place to start is those

investors who invest in your peers but not in you – why is this?

​2. ​Less is often more

It is not uncommon for institutional investors to be seeing half a dozen companies in a day, sometimes​ ​more during reporting season. Make sure your presentation pack is concise and work on the key messages​ ​and metrics. Characteristics such as visible, recurring revenue, a high conversion ratio of profit into cash​ ​and the ability to fund a decent dividend yield will all be well received.

​3. ​It’s a marathon, not a sprint

Don’t expect investors to buy in the first time they meet you. Investors will take comfort the next time​ ​they see you if you’ve delivered on everything you said you would last time. It helps build trust.​ ​Depending on the size of institution you meet, they will sometimes have their own in-house analyst with​ ​expertise in your sector who will want to check everything stacks up and even talk to your customers or​ ​competitors. Further, there may be an investment committee that needs to sign off on any new investment

in the fund. This takes time and can also be a considerable effort on behalf of the investor itself.

​4. ​Under-promise and over-deliver

The ideal scenario for any quoted company is to set expectations at a level where they can be reliably met​ ​or even slightly exceeded. Make sure the ​b​oard are comfortable with market forecasts and, ideally, leave​ ​room for a small upgrade over the course of the financial year. Over time, a company that regularly meets​ ​or exceeds expectations will have a higher rating than one that does not. One such company on our​ ​doorstep that has perfected this art is Leeds-based transport technology company, Tracsis. As a result, it

has a shareholder register that is second to none and a rating to match.

​5. ​Investors are like sheep

Investors prefer safety in numbers. The hardest institutional investor to attract is the first. After that, and​ ​depending on the strength of the name on the register, others will take comfort that the company is pre-vetted or of “institutional quality” and it will be easier to get others on board. Investors like telling others​ ​of their latest investments so don’t underestimate the PR value of a supportive investor.

​6. ​Show skin in the game

Investors like to see management’s interests aligned with theirs. What better sign than for the ​b​oard and​ ​senior management to hold meaningful numbers of shares themselves. Management are the ultimate​ ​‘insiders’ and director buying of shares (which is a matter of public record as it needs to be announced to​ ​the market) will be viewed positively by investors.