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).
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Hide AdWhilst 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.
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Hide AdBelow 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
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Hide AdIt 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
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Hide AdThe 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 board 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
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Hide AdInvestors like to see management’s interests aligned with theirs. What better sign than for the board 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.