Small-cap companies have an opportunity to target new investors as interest rates fall, but they must be succinct in their messaging to capture attention.
That’s according to panelists at the IR Magazine Forum – Small Cap, which took place in New York earlier this month.
The event occurred five days before the US Federal Reserve lowered interest rates for the first time in four years, opting for a more aggressive half basis-point cut.
‘I’m actually very optimistic,’ said one small-cap IR professional at the conference. ‘A lot of capital is going to start moving around.
‘It’s really important for everybody in this space to hone in on the message, because there’s going to be a lot of… potentially new investors, as they move away from being wholly invested in a certain class of company and look to diversify.
‘All of a sudden the cost of capital is going down and you can take on a little bit more risk, which makes a small-cap stock more interesting. There are going to be all kinds of people looking at our class of stocks.’
He added that it’s vital for IROs to identify the ‘two or three things’ that define their business: ‘Are you a cash rich company? Do you have a high free cash flow yield? Is there a lot of growth that’s going to be unlocked because your cost of capital is lower?’
Wind in the sails
Another IRO, from a Toronto-listed small cap, noted that the Bank of Canada has already made a number of interest rate cuts and ‘you’re already seeing that level of gearing and torque toward small caps starting to occur’.
He said a further wind in the sail of small caps will be political stability in the US once the presidential elections have concluded in November.
‘That does lend itself to investors being less short-term-focused and having that medium-term outlook,’ he said. ‘Focusing on your medium-term message is where you’re going to start to get attention, which is very different [from] when things are going haywire [and] you’re being much more tactical.’
Simplicity of message is key to cutting through all the ideas small-cap investors consider on a daily basis, said another speaker.
‘Think about it in the sense of generalist investors,’ he explained. ‘They have hundreds and hundreds of names to look at across all sectors. They need to pick up a name and be able to digest it quickly and, if not, they have the liberty to just move on. You want to have a very simple, easy-to-tell story.’
Lessons learned
Given the hard times small caps have experienced in recent years, panelists discussed how investors appreciate it when companies are reflective of what they have been through and explain how they have adapted.
‘We were very upfront in saying, We’ve learned our lessons. We’ve now described it as having a PhD in what not to do in certain of these types of contractual arrangements,’ the audience heard. ‘We’ve actually embedded that right in our materials and our investment thesis.’
Speakers also talked up the importance of engaging with hedge funds, even if your management team requires some convincing. ‘These are huge reservoirs of capital now,’ one IR professional said. ‘I feel it’s negligent if you’re avoiding them – they’re a real asset class and you should be paying attention to them.’
Crucially, hedge funds can help small caps with liquidity issues, laying the ground for larger funds to come into the stock later on, said the IRO.
‘If there’s not enough trading in your stock, you are portioning off huge swaths of the investment community because the risk is too high,’ he said. ‘A fund isn’t going to invest in your stock if it takes it a month to accumulate a position. Your daily liquidity, your flow – all of these things matter, and that’s where hedge funds are very helpful.’
To learn more about the event or see the full agenda, please click here.
