by Bill Mahoney

Be persistent in seeking notice if you think your company is being ignored.

The challenge for many investor relations officers is to get investor and analyst attention. Reality is that most companies simply aren’t well known or even a little known by the buy-side analyst/portfolio manager community.

Dr. Baruch Lev, a professor of accounting and finance at New York University, suggests there are about 3,000 companies that are undervalued because investors lack good information. These include numerous mid-cap, small- and micro-cap companies.

Sell-side research hardly covers the universe either. According to Nelson’s Information, nearly 4,400 of some 8,300 companies tracked are followed by fewer than three analysts. Indeed, some 1,135 of companies in the Nelson database have no analyst coverage, and 2,460 are covered by just one or two analysts.

While the market has enjoyed an extraordinary eight-year bull run, statistics indicate many companies have been left out. Investors apparently continue to be attracted to growth stocks, and most of these fall into a handful of categories - technology and certain other industries in favor at the time, large-cap blue chips and those beloved dot-coms.

Performance of the stock indexes supports the notion that investors have a narrow perspective in their stock selection. Some 65 of the Nasdaq composite index of 4,845 stocks constituted 99 percent of its increased return over the past year, according to Birinyi Associates and The Wall Street Journal. Further, just 10 of those companies contributed 75 percent of that gain. Similar numbers come out of close analysis of the Standard & Poor’s 500 index and others.

Indeed, people who bet on the indexes worry that some of these leading growth stocks are going to lose some momentum, be seen as overvalued or that investors simply will shift away from these glamour/growth stocks as the market broadens its interest. There’s growing talk about value, cyclical and small-cap stocks coming back into favor.

That, of course, would be good news for frustrated CEOs, CFOs and IROs fighting for analyst and fund manager attention. These efforts reaffirm investor relations’ most basic principles: The job centers on getting the best information possible to investors most likely to be interested in buying and holding shares.

That’s a deceptively simple proposition. And a big job when done to its fullest. Success depends on being able to deliver the information each sell- and buy-side analyst and each portfolio manager needs and demands.

The first question is, “How do I get an analyst or investor’s attention?” The answer: Tell a compelling story about your company’s ability to grow and achieve returns higher than they are currently. Calculating a company’s expected return is virtually what every investor does - expected growth rate in revenues and earnings and expected valuation, namely, stock price.

Focus on Drivers of Growth Prospects

for future growth must be real, of course. The information that matters centers on the drivers of that growth. They vary by company. The IRO’s job is to understand those drivers and to communicate them persuasively and selectively to industry analysts and institutions that will respond positively to the message. A key part of this communications mix consists of the non-financial factors that drive financial performance. Lev considers intellectual capital to be a main driver of many companies that are undervalued today because they aren’t well understood by the market.

Studies by academics and consultants have done a good job of identifying the qualitative factors important to investors. These studies clearly show non-financial factors are critical in portfolio manger decisions. Key factors include whether the company has a strategic plan and how good it is, quality of management, new product development, intellectual capital, market leadership and strength of customer relations. Managements are measured against a wide set of abilities - to meet operating and financial objectives, to allocate resources productively, to innovate and to attract and retain talented people.

Lev has done and seen studies that show sell-side analysts have higher accuracy in predicting earnings of companies and industries that are less dependent on “knowledge assets.” However, the value of analyst forecasts is greater in industries that are harder to predict, he adds. He cites such industries as technology, telecommunications and pharmaceuticals. In these, he says, “we see a huge contribution of analyst forecasts.”

Managing Expectations

IR is all about managing expectations - and managing expectations is a process. It starts with a company’s ability to understand itself well enough to maintain internal forecasts that are close to reality. This means thoroughly understanding the dynamics of the business, the company’s markets, competitive forces and performance. It can be tricky. Some industries and companies are inherently more stable and predictable than others.