Investor Relations for Small-Cap Companies

Small-caps may enjoy less sell-side coverage and deal with tighter constraints on time and resources, but ''small'' does have its advantages, too.

At companies of every size, executives who deal with investor relations must face hurdles posed by the economy, scheduling conflicts, securities regulation, and a plethora of other circumstances. At small-cap companies, however, they face additional challenges, often created by a scarcity of resources and by a continuing need to raise the company’s profile among investors and analysts.

Small-cap means different things to different people, but one common definition is a stock with a market capitalization below $1 billion; companies below $500 million often are referred to as micro-caps. Many market-watchers use the Russell 2000 Index as a guideline; as of early November 2003, the index had a market-capitalization range of approximately $1.2 billion to $117 million.

The challenges faced by small-cap companies include:

  • Lack of brand name recognition. Many small-cap companies do not have the same recognition enjoyed by their larger-cap counterparts, so they find it more difficult to attract investors, particularly retail investors.
  • Less liquidity. Due to their smaller float and relatively smaller pool of investors, small-cap stocks typically are harder to buy and sell easily. Since most investors prize liquidity, this can create a vicious cycle by repelling investors who will buy only liquid stocks.
  • Higher volatility comes in tandem with lower liquidity. For most investors, high volatility is undesirable.
  • Fewer resources. Most smaller-cap companies have fewer employees and other resources to handle a comparable workload; often the IR budget is relatively lower, too.
  • Lack of sell-side research. Many smaller-cap companies have fewer sell-side analysts covering their stock. Since most investors use some formal analysis to make investment decisions, sell-side coverage is valuable for attracting investors who might not otherwise find an emerging company on their radar screen.

Selling to the Sell Side

That’s why, at many small-caps, “the biggest challenge is obtaining sell-side research coverage,” according to Tom Newberry, the vice president of corporate communications at Framingham, Massachusetts-based GTC Biotherapeutics. But as banks continually reevaluate the companies they cover in a tough economic environment, preference often goes to the larger, more established companies, while smaller companies see their coverage decline.

Of the S&P 600 Small Cap Index constituents that had some coverage at the end of 2002, this year more than 300 lost one or more analysts who used to cover their stock. Fewer than half that number gained additional coverage, according to a recent Thomson Financial analysis. The average number of analysts covering small-caps decreased from slightly more than 6 per company to about 5.5, an 11 percent decrease over the first nine months of 2003. From a different perspective, the “losers” lost nearly two analysts per company, while the “winners” gained slightly less than that number.

Adds Newberry, whose company has a market capitalization of about $100 million, “The emphasis is on the larger-cap names because of the flow of trading commissions.” Furthermore, an event at a large-cap company in the same industry, such as a delay in the approval of a key drug, can buffet small-cap brethren on the theory that the same problem will apply. “No matter what the IR person tries to do about that, it’s not going to change, you’re still going to get whacked pretty hard,” Newberry says. “The only way to counteract that is to perform differently, which is a ‘recover later’ kind of strategy, rather than a ‘prevent the slide’ strategy.”

Discuss

Your email address will not be published. Required fields are marked *