Big IR at small caps
When Monaco Coach Corporation went public in 1993, the management team was fully prepared for the challenges small-cap companies typically contend with: small floats, negligible track records, liquidity problems and tight budgets.
But what Mike Duncan, IR manager for the $345 mn recreational vehicles company based in Coburg, Oregon, could not have anticipated was the frenzied attention internet-related businesses would one day attract. Unfortunately, that left their rather more pedestrian small-cap peers, like Monaco Coach, scrabbling around in the cyber-dust looking for the leftovers of investor attention.
Duncan sums up the plight of little guys everywhere: 'There are so many good small-cap companies out there fighting for attention. We're all competing for the same three lines of press coverage. The biggest challenge is to get yourself onto the people's radar screens. We're not a glamor industry. There's not a 'dot com' after our name.'
Inferiority complex
Lack of cyberspace cachet is giving many a small company an inferiority complex. According to Ted Pincus, chief executive of the Financial Relations Board (FRB) in Chicago, 'Everybody's intimidated by the success of the internet companies. It's the hottest thing ever to reach the stock market.'
But Pincus emphasizes that there's a silver lining for companies not trading at 90 or 900 times earnings. Low or no-tech small caps may not be sexy, he points out, but they're still pretty attractive to value investors who savor a bargain.
One trend, according to Pincus, is that chief executives at small caps are demonstrating a new-found willingness to communicate personally with investors. 'Top management is getting much more into the mode of personal salesmanship. They are less likely to leave it to the agency, or the IR consultant, or even the CFO,' he says. Of the 500 publicly-traded companies FRB represents, Pincus estimates that two-thirds of them have chief executives who participate in earnings teleconferences, while only one-third were doing so just a few years back.
Outside of the US, investor relations is also gaining recognition among small caps, although responsibility for the function is still typically shouldered by upper management. In Europe, the finance director usually handles the investor relations function at small caps. The same goes for Asia. Companies in Japan typically retain the investor relations services of the investment bank that took them public, and hire a dedicated investor relations officer only after they have been on their market feet for a good few years.
Take Harry Cooper, group finance director for Whatman, a UK separations and filtration company based in Kent, just south-east of London. Cooper shares investor relations duties with the CEO and reckons he spends an estimated five-to-six weeks a year on investor relations, but isn't concerned that nobody's minding the IR shop full-time. 'Even in larger companies,' he says, 'it's still the chief executive and chief financial officer that investors want to meet.'
A seasoned investor relations officer is high on many small-caps' wish lists, but having no investor relations officer may be preferable to letting someone who lacks the necessary qualifications lead the function. Carl Thompson, an investor relations consultant specializing in small-cap companies as chief executive of Colorado's Carl Thompson Associates, finds fault with investor relations professionals who are really not much better than 'glorified secretaries. They don't have the skills, the background, or the contacts to do investor relations well,' Thompson laments. 'Investor relations calls on so many disciplines. You're talking about a left-brain/right-brain profession.'
What the buy-side obviously wants is easy access to corporate information – period. Fred Astman, portfolio manager at First Wilshire Securities, a Pasadena, California-based firm that manages around $90 mn in assets, all in small caps, prefers speaking directly to a company's chief financial officer or president, but he cares much more about getting investor relations answers quickly than about who furnishes him with the answers. One problem, he says, is that you can't always make contact with senior management as quickly as you might want – but that can be fine too. 'They are too busy running their companies.'
They won't come knocking
Astman is critical of companies that completely ignore investor relations and simply trust that investors will understand their businesses unassisted. 'If nobody knows your story, you're not going to perform,' he says. 'It's ignorance. Top managers think, The stock will take care of itself. But it doesn't work that way.'
Thompson agrees: 'The chief executive has to be the ultimate optimist and cheerleader for his company. But so often we find they have an abrasive arrogance about their companies. They feel they have the greatest thing since sliced bread, and that it should be valued as a $10 stock when the fundamentals make it a $1 stock. We have a saying around here: We can't perfume a pig.'
Rather than wait for institutions to come calling, Monaco's Duncan believes that small-caps should be ready and willing to make the first move. Get out there and bang on a few analysts' doors is his advice. He regularly contacts analysts who he knows cover the competition and, initially at least, volunteers to discuss industry developments with them. 'Sometimes,' says Duncan, 'you have to put your arm around them and belly them up to the bar. Soon they're happy drinking with you and not your competitor.'
Lever away
Duncan also underscores the importance of understanding and leveraging the relationship between the banking and research sides of the investment coin. When investment bankers approach Monaco Coach touting their corporate finance expertise, Duncan asks the name of the individual researching the transportation or luxury goods industries and then calls that analyst directly.
Thompson makes the same point even more bluntly: 'Waving the carrot of corporate finance will enhance your efforts in gaining new analyst coverage.' In other words, companies that dangle potential business in front of an investment bank may suddenly find the sell-side research department is willing to nibble with a little bit of coverage. And a small nibble may mean they stay hooked even if the corporate finance carrot is never gobbled up.
For some small caps, such as Mastech Corporation in Oakdale, Pennsylvania, attracting analysts isn't the problem. 'One of the biggest challenges,' says Mastech's investor relations officer Charles Mazur, 'is getting through the front door of the buy-side.' Mazur has found that poring over 13F filings, learning who Mastech's institutional investors are and which institutions are investing in the information technology service company's competitors, is a good way to generate prospects.
Relishing the personal touch, Mazur keeps alive his investor relationships by handling as many as 60 or 80 phone calls on a volatile day (15-20 calls is more typical). Despite such a hectic schedule, he takes the time to be proactive, contacting existing and potential institutional investors with industry news or copies of interesting articles.
Don't forget mom & pop
Individual investors represent an untapped opportunity for many small-caps, according to Thompson. He's a true convert: 'The individual is online, has money, and is more investment savvy than ever. The individual investor is fast getting on a par with the money manager on Wall Street in terms of information.'
Indeed, retail investors are a relatively untapped market for small-caps as far as many advisors are concerned. Whether it's through retail brokers (a much neglected source in many markets), through the web, or through easy-investing plans similar to Drips in the US, retail investors can help provide a significant buoy to a stock. Add to that a little bit of retail investor liquidity and suddenly the institutions that felt shut out of your stock due to liquidity problems in the past may just begin to bite.
Several European small-cap companies have found that targeting decent-sized retail investors through careful analysis of retail brokerages can help get them out of what Jonathan Gillen at London-based City Profile refers to as the 'micro-cap malaise.' Indeed, in the UK, a number of agencies, including City Profile, Salisbury Associates and Brunswick Group have been putting a great deal of effort into this area for their clients. One London-based consultant reports that many small-cap companies are truly amazed at the level of interest from the retail community.
In the States, Monaco's Duncan has tapped into the retail market by getting involved with the local chapter of the National Association of Investors Corporation (Naic). Duncan maintains that members of investment clubs love small caps. Moreover, 'they really are the least skittish investors you'll find,' he maintains. 'They're much more patient about riding out blips in stock price.' On average, a Naic member holds a stock for over seven years.
Online excitement
Another way of reaching individuals is through the internet, which lets small-caps communicate directly with their investors, domestically and internationally, as easily and effectively as leviathans like IBM and Microsoft. 'Technology has affected small-caps, as well as large companies,' says Thompson.
The internet has also helped level the playing field for Asian companies too. Yumi Asahara, managing director, international, at Thomson Financial Investor Relations, describes Asian companies as 'very keen on setting up web sites.' In other countries, governments are encouraging use of the internet to make disclosure more transparent. Cooper notes that Whatman has an IR web site where it posts financials: 'There's pressure from the UK accounting body [the Accounting Standards Board] to make your results available on the internet.'
Jaime Zevada, head of IR for Mexico City-based Corporacion Interamericana de Entretenimiento (CIE), the largest live entertainment company in Latin America, does four or five roadshows a year. But it still views the web as invaluable for communicating with overseas shareholders (65 percent of CIE's shareholders are in the US). Like most Latin American companies hitching their wagons to cyberspace, CIE's web site is in Spanish, but Zevada says his company is now developing English content as well.
When asked what they would do if their companies doubled or tripled in size overnight, small caps talk of hiring staff and planning longer and more far-reaching roadshows. Yet they also discuss values they'd retain, no matter how large they become.
One advantage of being a small cap, Whatman's Cooper says, is that 'You end up with a much more personal relationship with shareholders.' With 80 percent of Whatman's shares held by fewer than 50 shareholders, he points out, 'It's physically possible to meet the majority of your shareholders in a small amount of time.'
Companies find that as they grow, communicating becomes less spontaneous and more of a production. 'At one time,' recalls Monaco's Duncan, 'we could call all six people who would be interested in a conference call. Now I need 100 names and 30 people are on the conference call. It's an adjustment to know how to handle that.'
Above all, Duncan enjoys the fact that he is so accessible as IRO at a small-cap. He fields anywhere from seven to ten shareholder calls a day and receives around 20 e-mail requests for materials a week, all of which he handles personally. 'If our secretary says I have an investor relations call, no matter what else I'm doing,' says Duncan, 'I drop it to talk. I wouldn't change that.'