The Equity Group
Since mid-March, professionals with corporate investor relations responsibility have been significantly challenged in their role as a company’s frontline spokesperson and chief conduit to the investment community. The worldwide spread of COVID-19 and the abrupt shutdown of the U.S. and global economies required management teams to suddenly engage in battles on multiple fronts – from health and safety, to extreme disruptions in demand and supply, to the clouding of previously clear visibility. Investor relations professionals for companies large and small have focused on synthesizing numerous disparate pieces of rapidly changing information relating to operations, end markets, geographies, liquidity, and other key factors impacting equity valuations, into useful updates for investors and analysts, particularly through the unprecedented 2020 calendar first quarter earnings season.
At the time of this writing, COVID-19 cases are surging throughout numerous states that were largely spared from the devastation that hit the Northeast earlier in the pandemic crisis, dampening hopes that the U.S. will see an end to the “first wave” in the summer, before what many experts believe to be the more severe “second wave” in the fall. With potentially no reprieve from the battle with the virus in sight through the end of the year, uncertainty about the U.S. economy and, despite its resilience, the stock market, has and will continue to keep the role of public company IR more critical than ever with respect to the investment community’s understanding of the extremely fluid situation for each company. Faced with this challenge, it would seem that IR initiatives outside of those focused on the blocking and tackling of crafting effectively messaged communications and maintaining consistent interactions with investors via virtual conferences, non-deal roadshows and one-off calls should be put on the shelf until a great deal more normalcy returns to the business environment. However, one IR initiative that should be given extra consideration at this time is a perception study.
Typically viewed as a major, month-long or even multi-month project providing information on investment community views on an exhaustive list of company-related matters, the perception study can be deployed as a more precise instrument, zeroing in on the issues most salient to the subject company at a specific point in time. Utilized in that manner, with a succinct list of highly focused discussion topics for conversations with investment professionals that can provide meaningful, actionable insights, the feedback from a perception study can help IR and management greatly enhance the effectiveness of their communications and possibly even improve their business and capital allocation strategies during this period of great uncertainty. Generally speaking, individuals that agree to participate in a perception study do have something to say; and it is worthwhile to hear it. Below are five examples of reasons for conducting a perception study at this time, particularly for small and micro-cap companies:
1. Gaining a stronger grasp of investors’ and analysts’ understanding (or misunderstanding) of a company’s end markets’ exposure to COVID-19 headwinds, disruptions to operations, and/or any opportunities created by the pandemic crisis. In recent months, investors have tended to “throw the baby out with the bath water,” meaning that if they believe a company has exposure to certain industries hard hit by the crisis, such as oil & gas, airlines, cruise lines, etc., they’ve sold first and asked questions later (or not). Often, a particular company may be much less levered to a challenged sector than the equity market believes. Conversely, a company may have much more exposure to a positive demand or operationally favorable dynamic than investors realize. A perception study can help uncover these misunderstandings and enable a corresponding adjustment or pivot in communications.
2. Obtaining feedback regarding the company’s communication content and materials since the crisis emerged in March 2020, particularly with respect to the first and second quarter earnings announcements could be extremely helpful in producing more effective earnings releases, conference calls and slide decks for upcoming earnings cycles. The goal would be to bridge any gaps between the information provided and manner of presentation in the wake of the onset of COVID-19 with the informational needs of the investment community today. This is an unprecedented situation, and formalized, direct input from investors and analysts is valuable in optimizing the usefulness and efficiency of upcoming earnings materials.
3. Becoming aware of factors that may be causing a company’s stock to underperform versus peers and other similar companies and sectors. Underperformance may be tied to various factors such as concern over capital structure and liquidity, overhang of a potential equity transaction, worries about a recent acquisition or issues with perceived credibility of management. A perception study enables a depth of discussion around these matters that might not otherwise occur in the course of an earnings conference call or other typical discussions.
4. Getting an understanding as to the difficulties in gaining new equity research coverage from traditional sell-side analysts (as opposed to company sponsored research), particularly for small and micro-cap companies. Commentary from industry-appropriate analysts as to their hurdles in launching coverage that may go beyond trading liquidity could be an opportunity to clear up any misperceptions about the company. It could also serve as a reality check as it relates to trends in equity research that are making it increasingly difficult for smaller companies (<$1 billion market cap) to gain coverage.
5. Attaining insight into the importance of Environmental, Social and Governance-related practices and disclosure. ESG matters are increasingly important to a greater pool of investors, and will likely gain further prominence in the wake of the global health crisis and recent social unrest in the U.S. A perception study can glean useful feedback on how investors believe a company is performing relative to key ESG areas of concern, and help educate management on the areas of the broad and sometimes nebulous ESG playing field that are of the highest priority to the investment community. This discussion could be particularly helpful in understanding how the Board of Directors as a whole, as well as individual Directors, are viewed with respect to quality, qualifications and alignment with shareholder interests.
These are just a few reasons for a public company to consider a conducting a perception study in the midst of the current heighted level of uncertainty in the economy and stock market. A perception study focused on 5 to 10 key topics with existing holders, former holders, holders of peers that don’t hold the subject company, and current and potential covering analysts can be conducted in a matter of a few weeks and can yield a wealth of actionable feedback for IR and management that might not otherwise have been uncovered. This is an initiative that should be elevated in the list of investor relations priorities as opposed to delayed due to what looks to be at least a several-quarter continuation of the current highly unusual circumstances for companies and investors alike.
If you have any questions or want to learn more about The Equity Group’s approach to perception studies, contact me anytime.
Fred Buonocore, CFA
Senior Vice President
The Equity Group Inc.