Many small cap companies get less media attention and scrutiny from analysts than companies with a large market capitalisation. This naturally leads to lower liquidity and higher volatility in the stock and can mean that their share price is not an accurate reflection of the value of the company. Small cap companies have significantly less resource allocated to investor relations activities, with many companies not having a job role solely dedicated to investor relations.
Recent developments have added to the investor relations challenges. Small cap companies are perceived as being more UK-focused than large cap companies and, therefore, their valuation is more affected by the uncertainty and economic developments associated with Brexit. Additionally, there is a risk that small and medium-sized companies could be disadvantaged by MiFID II because of the new restrictions around the availability of stock research. Investors often base their decisions on whether to invest in a certain stock on research reports. In their absence, investors will undoubtedly rely more on IROs (Investor Relations Officers) directly. This will clearly require the company to spend more time on investor relations activity, which leads to a resource challenge for smaller companies.
An effective response
With limited resource, it is essential that a clear goal and purpose to investor relations activity is established. If the Board of Directors and senior management are in agreement that long-term stock performance is the primary goal, then the investor relations activity can focus on communicating the sustainable competitive advantages of the company. By agreeing on a long-term focus, a company can avoid the pitfall of concentrating on short-term swings in stock price and using a disproportionate amount of time on investor relations activities.
Small caps should focus on producing communication materials that clearly convey the investment case, business model and strategy of the company. If done well, this information will allow an investor to understand the sustainable competitive advantages of the company. The level of interaction that investors will need with management of the company will be reduced, as key questions about the company will be answered through the detailed communications that the company produces.
We feel that the best focus for small caps in their communications would be the Annual Report. There is an obligation to produce an Annual Report, so it makes sense to create the best document possible and then use the Annual Report to update other communications, such as the corporate website and investor presentations.
The use of technology should be considered as well. With webcasts and videos of the management, investors can hear directly from the management team without needing to meet them in person. It is advisable to give investors the ability to put questions to management remotely, such as through analyst conference calls.
Looking on the bright side
With a smaller team of corporate stakeholders and a more accessible senior management team, it is perhaps easier to maintain a more consistent investor message. We'd love to work with you to get noticed. Come and see how in partnership we can achieve more exposure.