Doing more with less: Highlights from the US Small Cap Forum
At small and micro-cap companies, the investor relations challenges are markedly different from those faced by larger firms. At these smaller companies, resources are tighter, analyst coverage is sparser and marketing opportunities are harder to come by.
The average small-cap IR budget in North America is $320,000, compared with $527,000 across all cap sizes, according to IR Magazine’s 2017 IR Resources report. In addition, the average small-cap company has a one-person IR team, while large and mid-caps typically have at least two people on their teams.
The bad news for small caps is that the landscape may be about to get even more challenging. With Mifid II causing a contraction of the sell side, there will be fewer analysts to provide coverage. Some institutional investors have said they will not pay for corporate access under Mifid II, squeezing the sell side further and applying pressure to the cap sizes where they make the lowest margins: small and micro-cap companies.
These trends and statistics provided the backdrop for the IR Magazine Forum – Small Cap US, which was hosted in late September at the offices of OTC Markets in New York City. While this perception of small and micro-cap life may sound daunting, attendees at the event showed that the small-cap IR community is full of engaged, energized and intelligent people who are motivated to find solutions. In this article, we summarize the key talking points.
Consider company-sponsored research
Almost two thirds of small and micro-cap companies have no analyst coverage, according to Theodore O’Neill, president at Litchfield Research (his statistic defines small and micro-cap companies as having a cap size of up to $250 mn and stocks that trade at $1 and above). By missing out on that coverage, companies are losing out on both earnings estimates and formal research reports, O’Neill said. He, and others throughout the day, recommended that small caps consider investing in company-sponsored research if they are concerned their profile is too low.
Loren Mortman, president of The Equity Group, said this can work for a lot of smaller companies, but only if their senior management has a sense of where the company is going. ‘It’s important for senior management to take a step back and understand the visibility it has,’ she said. ‘If it can’t figure out what the company is going to do in the next year or so, how is an analyst going to figure that out?’
For companies that have analyst coverage, O’Neill cautioned that they shouldn’t rest on their laurels. There’s sometimes a disconnect between the platform an analyst publishes research on and where an investor may be subscribed. ‘Ask your analysts which platforms they’re on – Thomson Reuters, Bloomberg, FactSet, and so on,’ he advised. ‘Then go to your shareholders and ask which platforms they use. It will give you a better sense of how the research distribution is handled.’
One by-product of Mifid II is that, while the sell side contracts, several boutique research firms are emerging that can offer company-sponsored research, as well as traditional research. Because these firms are not concerned with corporate access, they are not regulated by Mifid II. Given this rise of new research firms, judging quality can be a challenge. Jason Paltrowitz, executive vice president of corporate services at OTC Markets, recommended that small and micro-cap companies make the most of their network. For instance, he said, OTC Markets hears through the companies that trade on its platforms which research and conference providers are high and low quality.
Engaging with sell-side analysts
While analyst coverage can be harder to come by for small and micro-cap companies, that doesn’t mean IR teams shouldn’t concern themselves with the sell side. ‘Much like you have an IR and corporate access plan, you should have a plan around targeting analysts,’ said James Wong, senior vice president of corporate access at Raymond James. ‘Think about the most institutionally relevant analysts who cover your peer group and try to get on their radar.’
Jonathan Paterson, managing partner of Harbor Access, mentioned that an important part of this targeting is regularly getting in touch with analysts who are relevant to your company. ‘When you’re sending out a press release, make sure you follow up with the key analysts in your sector. Make sure you connect with them and that they have seen your announcement,’ he said. ‘I liken it to calling my parents back in the UK every weekend – it’s a maintenance call.’
Beyond this, J Marc Lewis, vice president of investor relations at MasTec, stressed the importance of building strong relationships with brokers. ‘For a small cap, they’re kind of your substitute sales force,’ he pointed out. ‘I’ve had five or six key brokers during my career that understood the story and sold the story really well. You want to look for the people who will call you when the stock is down and say, This looks bad – let’s make some money for our clients.’
Building and maintaining credibility
Given the reality that small and micro-cap companies can be faced with less visibility and fewer opportunities to market themselves, it is crucial to build and maintain a credible brand, Mortman said. The IR team is the first line of defense in making sure the Street’s expectations are in line with the company’s performance and projections – and that those are realistic.
‘Laying out future milestones and reporting on them builds credibility,’ Mortman noted. ‘But it has to be accurate. PR can be about inflating expectations, but IR is all about accurate expectations. If there’s a bump in the road, be transparent about it. Once a company starts missing expectations and disappointing the Street, investors can become pessimistic and assume the slide will persist.’
Lewis agreed with the sentiment. Part of the job of a good investor relations professional is to ‘maximize the impact of good news and minimize the impact of bad news,’ he said. When Lewis joined MasTec in 2002, it was a distressed micro-cap company but, over the last 16 years, it has grown to a cap size of $3.3 bn. The notion of maintaining credibility evolves as the company size grows, he said.
For instance, when MasTec was a small company, he was largely responsible for getting the C-suite in front of investors. Now, however, he rarely takes his CEO on the road and takes his CFO only about 30 percent of the time. ‘In my role, the main responsibility is pitching the stock,’ Lewis said. And one of the ways he does that is by maintaining a pitch letter about the company, which he updates monthly and sends out to investors. He added that it has been a useful tool in establishing his own credibility and providing talking points with investors.
Frequency and consistency are key in maintaining credibility, Paltrowitz said. One of the most common pitfalls OTC Markets sees small and micro-cap companies falling into is missing deadlines for regulatory filings. He urged attendees to stay on top of their deadlines and to prioritize them.