When You’re a Small Cap Stock in a Large Cap World: Five Ways to Stand Out
24 October 2019
By Marla Hurov
While several studies show that small caps actually generate greater long-term returns when compared to blue chip stocks, it can be an uphill battle to get institutional attention. Because of the intrinsic volatility of small caps, many high-quality companies may go under covered by analysts and are often overlooked by the Street.
But that’s not surprising. With small teams and tight budgets, compounded by the growing difficulty of getting analyst coverage, small caps face the inherent challenges of putting together an impactful program and effectively marketing themselves. According to IR Magazine’s IR Resources report, the average North American small cap IR budget was $320,000, compared with $527,000 across all cap sizes. And the average small cap has a one-person IR team, compared to the typical minimum of two IR professionals for mid and large cap teams.
With MiFID II’s impact on the sell-side, there are increasingly fewer analysts delivering coverage. Adding to this trend, the sell-side has a dwindling interest in making lower margins covering small caps.
The good news is that the Russell 2000 index has grown 255% over the last decade and recent markets have been mostly upbeat. But looking at this past year, the small cap benchmark has dropped by more than 9% — underperforming the S&P 500, the Dow Jones, and Nasdaq.
This all means that success for small caps is increasingly about marketing yourself more creatively and aggressively. Here are five tips to help small caps get noticed by the investment community.
1. Develop compelling messages
With less visibility and fewer marketing opportunities, it’s crucial for small caps to develop and maintain a brand that’s both credible and compelling. Today’s highly volatile and competitive small cap space points to the importance of attracting interest with a concise and forward-looking story, focused on differentiation. Shine a light on “quality,” by conveying how your company is the “best in class” at something uniquely valuable.
The secret is positioning yourself in a niche. Start by developing 5-6 core messages that talk to how you’re satisfying a defined market need, tying your product/service with your financial performance and market opportunity. And then consistently integrate and reiterate these messages across all communications — from your website to roadshows, press releases, and shareholder calls.
The other key is presenting yourself as a company “on the rise,” with a convincingly concrete growth plan. Your CEO/CFO needs to effectively illustrate how you will become the company you aspire to be and how you’ll finance that growth — including customer acquisition costs, customer lifetime values, acquisition channels, and short-term capital requirements.
2. Provide the right key metrics to help investors measure your progress
As your company grows, maintaining credibility is key. It’s essential to stay consistent and diligent about disclosure and the metrics you are providing. Ensure that your filings and press releases are timely and be consistent when informing the Street about news (both good and bad). Be realistic about the size of your total addressable market and future milestones, and be transparent about any bumps in the road. It’s important that Street expectations are in line with your company’s performance and projections.
The trick is painting a vivid picture of why your company is a good investment opportunity. Take a comprehensive approach to gathering all relevant information for disclosure. Help analysts and investors understand the drivers of your company’s performance, providing additional notes on each metric you present. Give the Street enough detail to see the full picture and make accurate forecasts.
In addition to timely financial reporting and regularly updating investors, you need to be consistent about sharing your story with prospects. This is particularly true for keeping up market interest when there’s an ebb in news flow. Consider creating a monthly pitch newsletter for investors, as well as regularly updating your investor presentation.
3. Target the right audience
Investor targeting is essential for improving liquidity and market capitalization. According to Q4’s CEO Darrell Heaps: “With MiFID II, there’s an overall decline in the number of sell-side brokers serving the broader corporate markets. Brokers are still helping larger companies, but there is also a far greater responsibility on IR teams to identify and connect with targets themselves.” He adds that the evolving nature of today’s investor is “making the traditional method of simply matching, for example, a growth stock with a growth investor harder to achieve.”
Darrell recommends focussing on potential investors that are a good match on a variety of levels, not just broad style classifications or peer analysis. One way is focussing on your best long-term prospects, who understand the dynamics of your business.
However, many small cap companies target institutional investors — at the expense of retail. In reality, retail investors are the most likely to become small cap shareholders. According to the SEC1, 70% of companies below $250 million in market cap, on average, are owned by retail investors. Targeting longer-term retail shareholders can be an impactful way to grow your shareholder base. Not to mention that growing your trading volume also increases the appeal for institutional investors.
4. Get creative about a shrinking sell-side
With boutique research firms emerging to provide company-sponsored and traditional research, now more than ever, small caps need to make the most of their networks. It’s important to watch companies that trade on your platforms, along with their research and conference providers.
And while roadshows and conferences have been the traditional go-to’s for meeting prospective investors, travel costs can add up. Small cap companies should also think about creative ways to get in front of investors. Consider hosting virtual investor events and conferences, leveraging real-time webcasts and online materials.
5. Raise your profile through earned media
Press coverage is important for getting noticed, especially by retail investors. You can effectively grow your profile through online media, print, and television. Another secret is building regular news flow with earned media, and then re-purposing it on your website and social media channels. So, go ahead, stir up those conversations in the blogosphere with retail investors. Uncover interview and guest blog opportunities for management to demonstrate that they’re industry thought leaders. After all, elevating perception is at the heart of every small cap’s growth.
If you’re a small cap in a large cap world, consider these five points to help you stand out. And if you’re interested in more best practices, take a look at how Good Energy designed their IR site to increase views by 317%.
Marla Hurov is Content Marketing Manager at Q4 Inc and blogs regularly about trends in investor relations, technology and digital communications.