Small Cap Stocks in a Large Cap World

Small caps are finding it increasingly harder to gain attention, with brokerage firms’ equity research leading to buying the largest and most liquid stocks (and MiFID II hasn’t helped). However, an effective IR strategy can make a big difference in attracting interest in small cap companies, helping to improve perception, increase valuation, liquidity and improve the overall corporate profile. We surveyed some of the literature on what small caps can do and summarize it below.

So what are the prerequisites for listed companies to attract investor interest? What does an equity story need to attract investors?

• For a small cap, there are 3 key things to keep in mind:
  • Relevance, how important are the products or services for society?
  • Market, is there a sizeable market for the product? Today’s small cap is tomorrow’s large cap.
  • Timing, creating investment opportunities. Is this a good moment for your story to be bought into?
• Show what the management team can deliver:
  • Credibility and confidence are key, people must trust the management given limited liquidity means any investment is for the long term.
• ESG is becoming increasingly important:
  • Bring the ESG angle, to show how sustainable the business is.

How can small caps convince potential investors about the feasibility of their equity story? How can they speed up a track record for new companies? What are the key metrics to focus on?

• Use common industry metrics, this allows consistent measurement and methodology to be used. It also makes it easy and quicker for analysts to understand.
• Talk to investors, what are they focusing on? What are they interested in? Market share, number of customers, etc.? Answer investor concerns, not your promotional points.
• Show the progress of what you promised.
• Provide guidance on tangible items that people can follow.
• Don’t change metrics from year to year. This breeds transparency, consistency and commitment.
• Alongside the trustworthy narrative that the company must have, there must be a strategic vision, and clarity in the goals and metrics.
• Even non-financial metrics like ESG are increasingly important for all stakeholders. Focus on social impact and gender as well as financials.

How to target the right investors as a small cap? What are the latest trends in investor targeting?

• A good place to start is to understand competitors and peers which investors have decided to invest in. They are possible investors in your company.
• The good news is that IR software is becoming more accessible. Everyone needs a decent CRM, and intelligence providers (like Bloomberg, Q4) have large databases.
• Always follow-up, long term relationships are key.
• Check any exclusions upfront, to not waste time on investors that cannot invest in the companies due to prerequisites.
• Make sure your Investor Releases are on Bloomberg, Refinitiv and Infosel.

How to get sell-side coverage? Or is it becoming obsolete?

• Sell-side coverage is particularly relevant for small-caps to market their stock.
• Work with the bank that did the IPO to market the stock and create a growing network. This must be very engaging for the sell-side and promote research.
• Focus on company news. This can be through the website and/or social media and can really help tell the story and show the strengths of the company.
• You must create demand. Who are your potential investors? What banks do they use? They don’t necessarily have to cover the company, but must be part of conferences (maybe ask for 1:1 rooms, etc.). Conference fees are coming down as virtual conferences become more prevalent.
• Corporate Sponsored research (you pay) has become mainstream, and fully accepted by the IR institute.

Be creative outside IR.

Investors, like all of us, get their information from multiple sources, not just Investor Relations websites. In a prudent and responsible fashion:

• Use social media to promote your story.
• Use video on your web and social media.
• Talk to the business press and get the story out.
• Get talked about in the investor aggregator sites (Motley Fool, Seeking Alpha…).

As always Miranda-IR is happy to help in all these areas.

Source: https://vimeo.com/437929052