Attracting Investor Attention

Investors, institutional or private, that specifically buy nano-, micro- and small-cap stocks, may consult charts and technicals before investing. Nonetheless, it is fundamentals that rock their world. It is fundamentals that excite them and motivate them to part with their money, and also, in the case of investment professionals (IPs), put their reputations in your hands.

Over the years we have compiled a laundry list that covers the range of fundamentals most critical to IPs.
 

 
Fundamentals IPs Look For From You

• An experienced management team that has related industry experience, a track record of success, and a clear vision for the company’s future, along with credibility and integrity.
• A well-defined, highly focused business, business strategy and Business Plan. This means that each component fits the total picture. There are also no jarring notes, such as subsidiaries with the potential to drain cash or other company resources.
• Fifty million or fewer shares outstanding. This is actually a “chicken and egg” controversy. Some argue that if there are too few shares their stock will lack liquidity. However, others say: “How can the company justify such a high market cap? With so many shares outstanding, how can there possibly be an upside to this stock?” The second set of arguments tends to carry greater validity, as stocks begin to move when all the fundamentals are in place and the float has enough shares to allow money managers to take initial positions. Smaller companies with too many shares outstanding are also easy targets for day-traders (people who are generally not concerned about your company’s health and well being). Day-traders look for the quick flip on the news that volatility brings. All investors know that most small companies will need to raise money at some point. And a company that already has numerous shares outstanding and more dilution to follow clearly has a big strike against it.
• A significant management holding position of at least 15% of the outstanding shares. This lets investors know that management is sufficiently motivated to deliver. It is also a good sign to investors when insiders continue to buy their own stock on a periodic basis.
• A history of delivering on promises within a reasonable timeframe. Although management often feels the pressure to “over-promise,” don’t cave in! A rule of thumb I constantly emphasize to my clients is: “Under-promise and over-deliver, and you will always find investors willing to put their money in your company.”
• An explainable chart. A chart that looks like a blueprint for a roller coaster ride better have a good explanation behind it. There are sometimes logical reasons for spikes, but often there are not. My mantra is: Know your company chart and how to explain its fluctuations.
• Money in the bank. Nobody likes to see his or her investments diluted. However, any reasonable investor prefers to see it happen before the dilution is thoroughly painful. My counsel here is: Make sure management is not in the position of trying to raise funds when the coffers are empty. Strong balance sheets are likely to inspire investments, while a company running on fumes will not, or certainly not at the terms you would prefer!
• Revenues, earnings, or margins that improve from quarter to quarter, or company developments that fulfill or exceed expectations. Your stock price will improve when you can show superior performance versus your competitors in at least one or two grading levels.
   

The Results Are In…
A survey we did at IRG of five hundred money managers with whom we work with who invest in small-cap stocks yielded some fascinating results. Only 30% of the money managers polled rated a company’s next quarter’s earnings per share (EPS) as “very important.” At the same time, portfolio managers ranked “experienced management” as the most important driver of value in an investment. For them this was followed by: 2) delivery on Business Plan; 3) revenue growth; 4) management ownership; 5) long-term capital investment; 6) low or no burn, or signs of a reducing burn accompanied with progress; 7) cash in the bank; 8) operating margins; 10) cost reduction; 11) quality improvement; and 12) sector momentum.

Money managers viewed the following as positive actions: debt retirement, major share buybacks, stock splits and changes in dividend policies and divestitures. Money managers view acquisitions as positive only if the fit is obvious and the plan well defined and well implemented. Interestingly, unlike money managers, company management viewed the following as positives: a change in strategic direction, asset write-offs and capital expenditures.