No matter what the economic circumstances are, whether recession, prosperity or uncertainty, it’s always important to know what forces are motivating capital to move in and out of your stock. IR professionals today do a great job developing messages, identifying value drivers, and crafting sophisticated presentations, but often ignore this basic rule: ‘Push messages to investors that can buy your stock now.’
For example, recent analysis of investment flows show that investors think many growth stocks are very attractive value plays. More time and effort should therefore be spent developing investment appeals that reach this group of investors.
It’s the IRO’s job to make sure management gets in front of the right people, but it’s expensive to take senior management time away from running the business.
Your bankers are an invaluable resource, but don’t expect them to target all the investors your company should be meeting. One of their jobs is to introduce you to their best clients, those investors that trade the most with them, not necessarily the investors that would make up your company’s ideal shareholder base. It shows an unfortunate conflict of interest when someone you thought to be a potential investor comments after a meeting, ‘That was a really great company. I’ll keep my eye on them. Too bad I can’t consider anything with such a small float.’
Simple as it sounds, management should not attend such meetings unless they have an achievable agenda to cultivate a pipeline of credible investor interest and sell their stock. Many management teams waste valuable time talking to unqualified prospects without first analyzing who they should be talking to. Obvious traps include meetings with large institutions that can’t take a position, short-term hedge funds, IR resistant index players and, in some cases, even meetings with the risk arbitrage desks.
This indicates that it’s easier to run a reactive IR program focused on investors that have already demonstrated an interest in your company. What is needed is a proactive approach to entice new, serious blood into the stock, the kind of interest that translates into a higher valuation and trading volume.
So how do you, as an IR professional, allocate resources and initiate a proactive targeting campaign? Analyze capital flows to qualify prospects and then expend your company’s limited IR resources where they add the most value.
The first step in any IR program should be to analyze your company’s stock and identify current shareholders. They offer the best indication of the types of investors interested in and able to invest in a company of your financial profile. For large and small companies alike, proper identification and monitoring of changes in ownership form the foundation of an efficient IR program.
Which institutions are buying? And why? Who else invests with a similar style? These are the people you want to meet.
Selling patterns are also important to analyze. Are IR-immune index players moving out of your stock? Or are growth investors disenchanted with the last earnings release? Could you now be considered a value stock or turnaround play? An understanding of your shareholder base, investment flows and valuation drivers is essential to influence current and potential shareholder activity.
Once you know the institutions, the next step is to break them down into people. Who are the decision-makers behind the investments in your company? What would trigger a decision to sell? Analyze trends to identify weaknesses in your shareholder base. These include size, style, orientation, asset turnover and geographic distributions of investors. It’s exactly this kind of information that allows you to track, model and influence shareholder activity.
Targeting new desirable investors can be achieved through a similar quantitative analysis based on your peer groups’ ownership. Keep in mind that your peer groups can consist of many targets other than traditional direct competitors. For example, you should examine shareholders that are invested in companies considered comparable from an investment, financial, industry or geographic point of view. These are your best targets – the investors most likely to be interested and have the ability to purchase your stock.
The final process is a qualitative screen or analysis to rank the investors into tier groups according to such favorable characteristics as low portfolio turnover, investment style and receptiveness to management contact along with the discretion over capital they represent. As competition for capital is fierce, it is the IRO’s challenge to convince the holders of these peer groups that your company is a superior investment.
The importance of monitoring capital flows in your company and its peer groups cannot be underestimated. IROs agree the message needs to be crafted with the audience in mind. Just make sure you’re in front of the right one.
