The recent turmoil in the global financial markets has certainly led to an abundance of fear. It has also led to the number of investors who are prepared to invest in small and mid cap stocks being drastically reduced. Unfortunately the massive downward revaluations in the market mean that the number of companies that are seeking to attract these investors’ attention is vastly increased as a result. So more fish in a smaller pond leads to that old law of nature coming into play – “survival of the fittest”.
During my time as a turnaround specialist, I saw a number of Companies paralysed by the indecision of the founder. They were scared to make the wrong decision when actually making no decision at all was worse. Many CEO’s quite rightly stopped non-essential spending during the unfolding crisis of 2008 in order to preserve cash reserves. Now the dust has settled, many CEO’s are still shell-shocked and unsure as to what to do and investment in IR has been drastically reduced when actually it is the best time to invest in it.
There is less noise out there to compete with, so to present to the investor community now makes it easier to get your message across. Investors have come back to traditional investing – the concept of a balance sheet, profitability and cash flow are back in vogue again so if your company fits this description then there was never a better time to shout about it. With shocks like Madoff, boringly profitable is good again – as a chartered accountant I’m almost beginning to feel popular as people get back to basics and have learnt that if it is too good to be true then it probably is.
If the CEO is still not convinced, he needs to ask himself what stage the company is at and apply some logic: Maybe the Company is preserving cash to make it last as long as possible until needing to raise more. Well that is all well and good but when that does finally run out the Company will be trying to raise cash from a smaller pool of investors and competing with a greater number of companies. If the dialogue starts now with investors, the Company will have quite a gain on the others and already have a loyal following.
Maybe the Company is cash positive but the CEO cannot justify the expense on investing in marketing the shares. Well I am unaware of any small/mid cap stock globally where the current valuation accurately reflects the underlying value of the business. To change this will not happen on its own, the Company does actually have to market the shares to create demand to take up the supply and once again the potential pool of investors has shrunk.
The role of the CEO is to lead the Company in direction and, of course, to be right!! I believe that when investors feel fear then the CEO should display boldness and confidence if it is justified. This is the time that investors are looking for a degree of comfort that when they do venture out of cash and into equity, they will be making the correct decisions and the Company must help them with this. Those companies with fundamentally sound underlying businesses that actually invest the time and money to tell their story confidently to the shattered investment community now will be rewarded with loyalty.
I am no history expert but after the 1929 crash followed the great depression. By the time the depression had started to reverse, equities had already increased in value by 40% since the crash. With interest rates on bank deposits currently negligible, it is evident that there is a desire to get back into equity as early as possible to make money at the bottom of the cycle again. Of course there is caution at the moment but there will be a time that this will happen and the CEO needs to make sure his company stock is on their shopping list when they do.