If you want your company to stay in the market for the long run, there’s no substitute for the basics: having a solid story and getting Wall Street to hear it.
Bad things happen to good companies in a bear market. Revenues, profits and balance sheet strength that would have assured double-digit share prices in the boom years may not be enough to keep a stock above the $1 mark today. Too many solid companies are in danger of being delisted. And there are ways to ward off this threat without resorting to quick fixes like reverse splits.
Nasdaq has been somewhat more lenient with listing standards since 9/11. Delistings for ‘regulatory non-compliance’ fell from 390 in 2001 to 280 in 2002. That’s up from the low of 240 in 2000 but well below totals for 1998 (596) and 1999 (440). The exchange has also extended the grace period for out-of-compliance companies from 90 days to 180 days, at least until the end of 2004.
Still, plenty of companies have been delisted recently or are fighting to stay in the market. To stay listed, companies need to take a long-term approach and deliver on the two essential goals of IR. First, they need to produce strong financial results and give shareholders a reasonable expectation that this performance will continue. Second, they need to reach investors with this story – investors with enough money to create new, sustained demand for the stock.
It all starts with having a solid story. Start by demonstrating profitability. If that’s not possible, show that the process is underway. Businesses need a growth strategy that makes sense. Evidence of competitive strength like high barriers to entry, unique products or long-term relationships with Fortune 500 customers is also crucial. Then you have to make sure the story is heard by investors who can help. For most small caps, which get little or no attention from analysts or money managers, this crucial step may be the most challenging. But being below the radar can actually bring certain advantages. For instance, it will be a fresh stock story for most investors, so when they do learn about it, they will be positively surprised.
Also, a small float means that a fairly small boost in buying demand can move the price up sharply. By marketing to a well-selected group of sophisticated investors with sufficient capital to risk, a company can move out of delisting danger and begin a sustained rise to price levels where it appeals to the broader investing public.
The stock market, like any other market, is essentially about supply and demand. If you control or manage the supply (by marketing to existing holders) and increase the demand (by marketing to potential new investors), you should have a rising stock price. This works especially well in delisting situations with stocks trading below $1.
Your IR consulting firm or in-house IR team should have a clear idea of who these investors are and how they can be reached, whether through brokers, money managers, specialized news outlets or general news releases. You should also actively market to current holders to keep them on board and encourage them to add to their positions.
Nasdaq won’t delist a stock that stays above $1 if certain other requirements are met. So why not just hike the price by exchanging, say, five or ten shares for one? Many companies have used such reverse splits to raise their prices to more attractive levels, at least in the short term. But this tactic has a questionable record, and for many it may not even be possible. For example, in some cases, a reverse split would reduce the number of shares outstanding to below required Nasdaq levels.
Even if a reverse split ends the delisting threat for a while, the company can be left with something of a stigma. Reverse splits have traditionally been associated with companies headed toward oblivion, and for good reason. Too often, companies get a temporary price pop out of it but fail to solve their operational problems.
The sophisticated investors who can really save a stock will see straight through the cosmetic split to the company’s essential business picture. Smart investors don’t ignore the basics, and neither should your company.
Haris Tajyar is managing partner of Los Angeles-based Investor Relations International +1 818 981 5300, [email protected]
