Q. We deal in security software so our customers tend to keep a low profile. How do we build recognition in the investment world during these difficult times? We are confident we will be profitable come July 2003.
A. Companies that successfully raise awareness gain increased analyst coverage, broader institutional ownership, more liquid trading and higher valuations. Small and mid-cap companies, however, have historically been disadvantaged in this area in comparison to better-known large caps. Fortunately, the situation is changing with recent legislative efforts effectively detaching investment banking from promises of analytical coverage.
We advise clients to take a building block approach. That means there are no silver bullets. Instead, we use each development to add to the prior one to build a stronger foundation. Updated core messages need to be developed to reflect your company’s new structure, profitability timeline and focus. Then the story must get out to a broader but targeted audience. This is accomplished by leveraging investment banking conferences, non-deal roadshows, quarterly releases and conference calls, and a structured flow of corporate news. Consistent communication is essential. Finally, truly successful plans leverage the financial media. Frequent coverage reinforces the investment themes with existing shareholders and raises awareness among potential investors, analysts and customers.
– David Pasquale, senior vice president, the Ruth Group
Q. What is the best way to increase analyst coverage of your stock? What if you disagree with how your company is grouped and would like to be classified differently?
A. With the major Wall Street firms, most analysts will ‘informally’ watch companies – when asked about companies by their buy-side clients, they want to sound informed even if they don’t have a formal recommendation. Meeting with these analysts periodically is a relationship-building exercise that can eventually lead to coverage as the analyst gains confidence in your business and management team. Other more immediately viable options include focusing on boutique firms that look at special situations, and targeting regional brokerage houses that either have an interest in locally based companies or have an analyst who has carved out a niche following your industry.
With respect to peer groupings, the fact is very few companies have more than a handful of direct peers, if any. But access to ‘comparables’ is central to an analyst’s or investor’s ability to confidently derive fair market value for any stock. And, once a company has been assigned its stripes, changing them is a complex task.
A company must make a convincing case that its business model differs materially from its peers’. The best time to make this case is when a company’s business is changing, perhaps due to a major acquisition that changes the fundamental business model. The tactics in engineering a change are centered on frequent, proactive communication with all Wall Street stakeholders.
Making the case to the company’s bankers, who are often in the best position to transition their firms’ research coverage, is key, as is spending substantial time educating ‘new’ analysts covering the desired sector. Appealing directly to the buy side, many of whom are generalists, is important as well. If a company openly specifies more appropriate comparables, investors might gain new insights into your valuation and join you in championing your cause.
– Jeff Majtyka, managing director, Brainerd Communicators
Q. Is the market for investor relations internet services a growing area?
A. Yes, it is. The internet continues to spur innovative changes in the way companies deliver news to shareholders, and to drive new federal regulations that prompt companies to use the internet in making information available to the public.
Online IR has been with us since 1995. Once companies begin using the internet for IR, they do not stop or cut back the services they offer to their shareholders.
In Europe, there is even more growth potential, since many companies are integrating the internet into their IR strategy. Leading European companies like Fortis are beginning to use audio and video webcasts to enhance communications with their shareholders. We anticipate double digit growth in North America, and even higher growth in Europe, this year and beyond.
– Ron Gruner, president & CEO, Shareholder.com
