Investors ‘fall’ for current, and even more for future profit

Small and medium-sized companies often find themselves in a situation where their shares are sold ‘for a pittance’. This happens because owners and management structures believe that if they manage their companies well and generate profits, investors will flock to them. However, that is not enough.

Written by: Dalibor Toth

Throughout this year, no Croatian company has gone public with an IPO; some announced it and then withdrew, and as the crisis began in the autumn, it is reasonable to believe that even those who may have had such intentions have left everything for better times. The upheavals in the stock markets have harshly taught many directors and owners of smaller companies what the capital market actually is – a turbulent, speculative, and unpredictable place by all standards. At the moment of an IPO or recapitalization, it was only important to raise money, and once that is done, it becomes a constant challenge. From an investment banker, one suddenly has to care about individual opinions, the future of the company’s business, and even for the ‘greater interests’ of the entire Croatian economy. Owners, company directors, financial directors, and investor relations managers do not need to seek evidence of altruism in the capital market; the investment public runs from one panic to another, unconcerned with concepts such as fair play.

Shares that are sold and bought on the stock exchange are never the goal, but rather a means to get rich – as soon as possible. However, despite the current lull and fear prevailing in the market, the market will recover, and investing is the inevitable way out of the crisis. Knowing this, owners and directors of companies, financial directors, and even the entire management team who directly or indirectly maintain relationships with investors are left with only one focus: to find the best way to keep the investment public satisfied. Essentially, the matter is simple – if an investor perceives that the goal of the owners and management structure of the company is to help them achieve financial benefits, and there is a high probability that they are capable of achieving that goal, such a company will be a safe choice for the investor.

Establishing Trust

Information related to the company’s activities, and there are none that do not interest the investment public, can in this case be structured and sent in the right way. Such an approach results in focusing the company as well as the investment public that follows it on the future and risk management, creating a bilateral relationship because that is precisely what the capital market does – it establishes trust. Those experienced in the stock market will say that there is actually no special mystery in these investor relations matters. Investors are also interested in smaller companies, and to realize that interest, such companies need to profile themselves as good candidates, build confidence, step forward, and most importantly, keep pace.

But what does this mean for everyday investor relations in small and even medium market capitalization companies? Such companies often find themselves in a situation where their shares are sold ‘for a pittance’ considering the price-to-earnings (P/E) ratio. Why? The answer is very simple and lies in the fact that the owners and management structures of the company believe, we can even say fanatically, that if they manage their companies well and generate profits, then the investment public will run to them. How far this goes can be seen in the presentations of companies that explain their operations in such detail, describe their products in such detail, how they produce them, and how they sell them. In practice, this is only part of what needs to be done because from the perspective of the capital market, every piece of information is valuable if it reduces risk. Since risk is related to the future, retrospective exposures of the company’s business do not help financial analysts much preoccupied with what will happen in the foreseeable future. The goal of the company’s business is and should be to increase value for its shareholders.

Three Positive Perceptions

We can somewhat understand the indecisiveness of companies when asked about the future. Most are reluctant to disclose their plans, citing business secrets or some confidentiality agreement, believing it is not wise to reveal details to their competitors. However, the trend is that analysts no longer accept such answers, citing the availability and speed of information circulation in the public domain, whether anyone likes it or not. By not disclosing their investment plans, the company only loses credibility, and it is important for them to recognize that they are only adding ‘fuel to the fire’. Until now, we have heard countless typical remarks from the investment public regarding the adequate presentation of financial results by operational divisions, insufficient information about risks and potential losses, insufficient details about profit margins, and even poorly presented accounts that come due, while investors remain uninformed about how the company operates and what has changed and why until the next annual report.

One of the more interesting pieces of information that a company can offer investors is the relationship between variable and fixed costs, showing how quickly some of them can be reduced. The second thing that interests investors the most is what the company can do to reduce the breakeven point, should that prove necessary during operations. In any case, the owner or management structure has succeeded if they convince the investment public of three positive perceptions: that the company is honest with itself as well as with investors, that the management structure is competent, and that there is a real growth potential for the company’s shares.

Investors Are Not a Homogeneous Group

In addition to the described general approach to the investment public, as well as the daily approach, it is also very important not to perceive investors as a homogeneous target group. Those who frequently move and communicate with small investors, institutional investors, fund managers, financial analysts, brokers, etc., certainly understand that each group has a significantly different level of knowledge and interest. As the company grows and develops its business, its profile also changes, making it interesting to different groups of investors. Changes such as the transition of the company’s shares from IPO to mainstream, entry into a narrower circle of companies that generate significant profits (e.g., CROBEX or CROEMI), and even when it comes to companies with large market capitalization can also significantly affect stock price fluctuations. Who could have thought in the 1980s that a giant company like IBM would today have to narrow its business into niches and pull itself out of losses?

One of the simplest yet crucial divisions is that of investors, especially financial analysts, into ‘buy’ and ‘sell’. Financing the company’s growth is important to present well, especially if that financing is unconventional in one way or another, to the buy-side financial analysts who will create and publish a good financial analysis if they understand how to model the expected results of the company. On the other hand, time should also be taken for sell-side financial analysts to understand the numbers from the model of the first group of analysts. Regardless, small market capitalization companies face a difficult and extensive task to get closer to the investment public. Due to the inexperience of the company’s leaders, investors often ‘get the chills’ when they hear statements like that the rise in the stock price will itself stimulate higher sales results for the company!