As US small caps enter the second half of 2017, they face various challenges on the macroeconomic front. IR Magazine hears from some experts
Making a general observation, Fred Buonocore, senior vice president of the Equity Group, an investor relations firm in New York, says: ‘We’re a little more than halfway through 2017 and so far it’s been a year of transition in the US and globally.’
What seems certain is that emerging trends that have been keeping financial markets and economy-focused professionals on their toes will continue, if not accelerate.
For small-cap companies, given their higher levels of customer concentration, more sensitive financial models, less flexible balance sheets and more limited trading liquidity and awareness from equity market investors and analysts relative to their large-cap peers, the impact of these trends can be more pronounced on both quarterly results and stock performance.
‘While creating greater challenges to investor relations practitioners, they also represent opportunities to become more vital to the interface between their companies and the investment community by becoming experts in the multitude of factors affecting their businesses,’ says Buonocore.
Politics and regulations
For Chris Tyson, managing director of MZ North America, the IR and corporate communications firm, two themes will affect small caps in the second half of 2017. The first is whether US President Donald Trump will deliver on his campaign promise of a lowered corporate tax rate and the second is the approval of policies that eliminate stringent financial regulations. ‘If one or both are not met, I would say small-cap stocks could lose the momentum established in the last nine months,’ Tyson warns.
There is no doubt that, since the election, the Trump administration’s insistence on the ‘America First’ message has benefitted small-cap stocks. As these are more than likely to be domestically focused, investors continue to be excited by Trump’s plans to create jobs, boost a long-standing need for better wages and enact tax reform that could put more dollars in corporate coffers and citizens’ wallets.
‘These [Trump] factors, combined with the anticipation of widespread infrastructure spending and healthcare reform, have brought the forward P/E for the Russell 2000 to nearly 25 percent above its historical average,’ says Jeff Stanlis, a partner at IR consulting firm Hayden Investor Relations.
He also makes a point about the SEC regulatory framework environment with regard to Gaap: ‘The SEC’s focus on Gaap versus non-Gaap metrics will disproportionally impact smaller firms. Often, companies that are marginally profitable, or not yet profitable on a Gaap basis, rely on non-Gaap metrics like Ebitda and adjusted Ebitda to demonstrate the earnings power of an emerging business model.
‘The SEC’s guidance makes that difficult, if not impossible. This will impact guidance, as well as quarterly reporting.’
Impact from Europe
Possibly surprising is the regulatory wind coming in from Europe that will hit US small caps. ‘The emerging regulatory change from Europe – Mifid II – has the potential to present a massive challenge for smaller firms,’ says Stanlis.
‘If this regulation is adopted by American banks, and many believe it will be, it could cost companies in the sub-$1 bn market cap space to lose access to institutional investors – in the form of non-deal roadshows – and make securing research coverage even more difficult.
‘Those companies, and their IROs, that have relied on mid-tier and small-cap broker dealers to gain access to institutional investors via non-deal roadshows as their primary means of reaching new investors on a one-on-one basis may find that avenue gone. This situation is quite new and, as it is primarily a European regulatory change, we suspect US firms have yet to come to recognize its potential impact.’
Sector focus: Healthcare small caps
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