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The Sharemarket’s Best Kept Secrets

There’s no better time to think big and get your message out to the market

The CEO’s of listed small-cap companies are now in the box seat to get above the noise in the market during the current part of the market cycle. A further lowering of the cash rate by 25 basis points by the RBA earlier this month to 2% creates a perfect storm of opportunity. This move will propel new and existing investors into the sharemarket looking for yield and growth potential to compete against a low return on cash investments and the dreaded inflation bogey. The long period of volatile and unfavourable equity markets, experienced since 2009, is now well and truly over and has now turned into opportunity. This part of the cycle has created a renewed interest in share investment not seen since before the last sharemarket boom of 2007.

The All Ordinaries Index has the best chance in years to go through the 6,000 barrier and to ultimately surpass its all time high of 6,800 reached in November 2007. This timing is conducive for the small-cap sector of the market to be heard with some voice in the wider investment community. The next few years will not be all about the big end of town. Indeed, any recovery in this part of the cycle is likely to initially focus on the big end of town, with companies that feature in the Top 100 to 200 shares, and then, as these shares get fully priced with price-to-earnings ratios nearing the top end of the range at 20 times or more, attention will move towards the remaining value at the small-cap end of the market.

If you are a small-cap company there are still many ways for the CEO to begin the process of getting the message out while the initial focus is on the big players in the market. The success of this approach can ultimately see the company more widely recognised early on, as the attention turns to the small-caps, and eventually create some real wealth for shareholders. In history, small-cap companies in the recovery and boom phase of the market have often been recognised as some of the best performers and can reward shareholders many times over. If you get this approach right you could become the next 5, 10, or 20 bagger.

How does a CEO set their company up for some serious market attention?

One of the greatest difficulties for a CEO of a listed small-cap company is actually recognising who to communicate with. Some companies don’t actually look beyond their own shareholders. Even these shareholders can often be ignored. What about sending each new shareholder a ‘Welcome Kit’? Or making sure that the company website has an active ‘Investor Section’ that deals with all the latest information about the company? A Quarterly Newsletter to existing shareholders can also be an extremely useful way of keeping these stakeholders informed and provide a heightened awareness about the company, its current activities and its Board and management team. Other stakeholders that will be very interested in the performance of a company in this sector include brokers, analysts, fund managers, small-cap institutions, private investors and the business media.

It is not simply a matter of issuing a release to the ASX and expecting that any interested party will somehow seek this information out from the ASX website. The CEO needs to fully embrace the investor relations process and develop a target list of stakeholders that need to receive regular communication. A company’s share price is built on the expectations that investors hold about its future prospects, but with past performance, management credibility, customer value proposition and competitive position being the key reference points. This is where the investor relations process comes in to ensure that the widest possible audience is fully up-to-date with the issues that drive performance and the strategies that will drive growth for the company.

Don’t make the mistake of communicating too early and too often to this target list, as this can work against the company. It is preferable to only issue information that is informative and may have some real impact on the prospects for the company in the future. It may also be useful to conduct a series of road shows and presentations to the market on at least a Quarterly basis and invite existing and prospective investors, brokers and analysts and the business media. It is all about building trust, gaining market exposure and committed interest.

The CEO may chose to do the investor relations work alone or engage with a professional company that specialises in this sector. Investor relations is still relatively new to Australia yet widely known and accepted in the US and UK. It is not unusual in these markets to see the name of the investor relations company appear in the Annual Report alongside the company’s accounting and legal advisers. A company performing this role, in conjunction with the CEO, enables a consistent and orchestrated campaign to be undertaken over a period of time, several years in some circumstances. This also frees up the CEO to concentrate on the all important task of running the company. These services may also include producing a company profile or research note that can often form the basis of a detailed broker research report once the company’s market capitalisation reaches about $100 million. Other services could include crafting and communicating the media release, providing fact sheets and background reviews. It could also involve, in the case of a mining and resource company, turning ‘geo speak’ into simple, plain English.

It is important for the CEO to communicate to the market in a language it understands and this is where investor relations professionals can be of the greatest assistance. The aim is to get the company onto the radar screens, boost liquidity in the stock and ultimately enhance the share price by delivering a consistent clear message to the sharemarket.

Remember, what all investors want to know is that the company is focussed on the growth of the business, its investment proposition, customer value proposition and the sustainable competitive advantage. Often investors ask, what makes a share price go up? By delivering consistent and sustainable earnings with no shocks is always a good start.

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THE BOOM PHASE BEGINS

9 O’Clock

The seeds of the recovery are now sown and eventually share prices will rise as un-employment, which is often regarded as a lagging economic indicator falls. Share prices move through a period of gradual increases from 6 o’clock until about 11 o’clock as commodities increase in price, overseas reserves are rebuilt and money becomes easier, subsequently property again becomes an attractive investment opportunity.

10 O’Clock

The improving economy leads to more aggressive market highs. A frenzy of interest and speculation begins, marking the beginning of the end of the recovery phase, which peaks when the economy is booming and everyone believes the good times will never end, as overseas reserves continue to rise.

11 O’Clock

More spending on government projects and infrastructure occurs in this phase, to create jobs, which increases the demand on private sector businesses. This in turn results in employment of more staff to cope with increased production needs. Lower interest rates then prompt businesses to borrow and invest in capital projects. Well before the Clock strikes midnight, wise investors have exited shares and are looking for the next investment opportunity.

8 O’Clock

During this time, companies are forced to become leaner and increase productivity. These measures and the slowly improving economy translate into increased company profits and this gradually stimulates share prices to recover. Investors who come into the market at this level often see excellent gains in the years ahead.

7 O’Clock

A recovery from recession begins with increased government spending and a sustained easing of interest rates. Interest rates fall to historically low levels and eventually a point is reached where long term investors see value in the market and start to accumulate the better performing shares – often you don’t need to look any further than the Top 50 companies for investment selection. With a lower demand for money and interest rates falling the economy is stimulated and share prices begin to slowly rise. Cash is no longer King and the value net of inflation begins to erode.

DEPTH OF THE RECESSION – THE RECOVERY PHASE BEGINS

6 O’Clock

6 o’clock marks the peak of a downward swing in the economic cycle. Investors are now either too scared, or cannot afford to borrow money and in response, interest rates slowly start falling. Individuals are now trying to pay off debt and spend less where they can, as well as trying to keep their jobs. A severe contraction in the labour market is often evident in this phase of the Clock. This can exacerbate recessionary deepening, unless correction through government fiscal and Reserve Bank monetary stimulus, and the return of business confidence becomes apparent.

5 O’Clock

Poor business confidence means that new capital ventures are postponed and Initial Public Offerings become a thing of the past. This is a time when capital is near impossible to raise and banks are not lending. Less spending and higher interest rates result in lower demand, which results in less production. Consumer confidence is at a very low level with demand for goods and services coming under enormous pressure. With fewer sales there is a squeeze on earnings, resulting in profit downgrades; and economic rationalisation becomes a hot topic in the boardrooms. The economy slows to the point where productivity stalls and then declines. When this happens for two consecutive periods the economy is said to be in a recession.

4 O’Clock

Decline into recession begins as business confidence starts to fall and consumers stop spending. Investors find little value in either shares or property and with impending trouble on the horizon fixed interest securities and cash become popular again – Cash is now King. A flight to quality assets occurs to protect what remains of an individual’s wealth. Often the gold price escalates at this time as it is seen as a store of value against worsening economic conditions. The dollar can also come under pressure to find the right level of adjustment in line with the prevailing economic ill winds relative to the rest of the world.

THE RECESSION PHASE BEGINS

3 O’Clock

Before the Clock strikes midnight, savvy investors have exited shares and are looking for the next opportunity, having realised that there is likely to soon be a correction in the market. 3 o’clock sees the realisation of this correction and the consequences that will inevitably follow. Subsequently, more people are selling shares within this phase and the lack of demand triggers a sell off, a slump in share prices occurs and coupled with falling commodity prices the decline accelerates. High interest rates, still persisting at the beginning of this cycle, slow the economy and lead us into the beginning of the recessionary phase.

2 O’Clock

The rapid growth of the property and sharemarket cannot be sustained for more than a few years and eventually the economic slow down becomes apparent. Interest rates continue to increase until it is no longer viable for purchasers to continue investing in property and soon supply outstrips demand. As interest rates rise companies find it harder to make profits and this, combined with the booming property market and the fact that fixed interest investments now seem more attractive, causes share prices to begin to fall or at least plateau.

1 O’Clock

As property purchases are primarily funded by borrowing; the increased demand for funds causes the cost of funds or interest rates, to rise. The Government recognises that the economy is overheating and introduces measures to enable a ‘soft landing’, by increasing interest rates to flatten demand by consumers. Often the inflation bogey can rear its ugly head in this period and monetary policy in the form of interest rate increases can be used to keep it in check. If the Reserve Bank over corrects in this period by raising rates too quickly and too high, it can cause the market to come to a grinding halt.

TOP OF THE BOOM – THE SLOW DOWN PHASE BEGINS

12 O’Clock


Boom Time is a period of greed and excess. Consumerism is at its most extreme, full employment provides for maximum optimism and a feeling of real and sometimes imagined wealth exists, where investors believe that the favourable conditions will continue indefinitely. A whole range of new players come into the sharemarket at this level, and often regret having little or no knowledge, relying only on what others have told them- that sharemarket investment ‘is easy money’. Smart investors get out on the way to and at the top of the boom by taking their share gains and moving into real estate as part of a longer term wealth creation strategy. At this stage of the phase, the rapid increase in the demand for real estate often pushes demand above supply and results in an increase in property prices. Property prices may rise well above real value and can come back to bite you later, if you have excessive gearing.