What We Have Here Is Failure to Communicate

The return of the individual investor to the stock market presents a golden opportunity for small public companies: If you’ve got a good investment story to tell, individuals are more eager to hear it than at any time since the 1960s--the last big heyday for small stocks.

Yet many small companies are making little effort to reach potential individual investors, or even to communicate well with those who already own their stock.

Why bother? For one, individuals tend to be more loyal to the stocks they own than are big investors--and that should be worth plenty to any small firm.

“There’s absolutely no question that individuals are longer-term investors than institutions,” says Louis Thompson, president of the National Investor Relations Institute, a group based in Washington, D.C., that promotes company-investor communications.

Because small investors are less likely to jump out of a stock if the company stumbles temporarily, they can provide an important base of support for the stock’s price and thus can lessen volatility. “That stability is a very important function,” Thompson says.

Likewise, when a small stock is owned by hundreds or thousands of individual investors rather than concentrated in the hands of a few large shareowners, liquidity in general is improved: There is a greater pool of potential buyers to offset sellers at any given moment.

Those are the more obvious advantages to small-investor ownership, but some small-company execs say the best payoff from courting individuals comes from the “bigger grapevine” factor.

“We sometimes have shareholders call to tell us about business opportunities (for the firm) in their part of the country,” says Jack Schoustra, chairman of Long Beach-based Earth Technology Corp., a $60-million (annual revenue) firm that analyzes environmental and engineering problems for businesses and government agencies.

The beauty of that kind of feedback is that if the company benefits, so do the shareholders--because their stock should rise as sales and earnings grow.

Of course, there is risk in encouraging closer company-shareholder ties, mostly to the shareholder: The stock market is littered with the carcasses of companies that drove their stocks sky-high through over-promotion, only to see them collapse when investors found that the firms were promising far more than they could deliver.

NIRI, in fact, was formed in 1969, in the aftermath of the small-stock boom-and-bust of the late-1960s. “There was a lot of bad (hype) stuff going on then,” Thompson says.

With 2,300 corporate members, NIRI works to encourage open communications between companies and their shareholders, and teaches marketing without hype, Thompson says.

What constitutes “good communications” from the small investor’s view? Here are some tips:

* News for all: Many companies get news of corporate developments out to big investors, but never consider periodic mail updates to their smaller investors. Yet the effort--and expense--is often worth it, says Andrew Rothman, a manager at the investor relations firm of Kalt, Rosen & Associates in San Francisco. “Small investors appreciate being kept informed, because getting news (about smaller firms) can be very difficult for them,” he says.

* Honesty: When a problem hits, be up front about it, Thompson says. “If you know you have bad news, it’s best to get it out early,” he says. When businesses try to cover up problems from their investors--or just from their smaller investors--”it takes those companies years to get their credibility back,” Thompson says.

* Accessibility: Small investors deserve access to top corporate officials who can answer questions about the stock and/or the business. Earth Technology’s Schoustra says he takes 80% of shareholder calls himself, and President Diane Creel takes the other 20%.

For small companies that would like to get their stock stories to individual investors, but aren’t sure how, there are a number of channels.

Syncor International, a fast-growing Chatsworth-based firm that makes radiopharmaceutical drugs (for X-ray diagnosis and other medical uses), has made a habit of encouraging brokerage-firm analysts to pitch the company’s story to individual investors (via retail brokers), not just to institutional investors.

“We tell them, ‘We know you’ll be talking to fund managers, but keep the individual investor in mind as well,’ ” says Michael Mikity, Syncor’s chief financial officer.

Communicating the company’s progress to stock newsletters used by small investors is another idea. The Hulbert Financial Digest in Alexandria, Va. (703-683-5905), is a “newsletter of newsletters” that tracks the topics and track records of dozens of investment newsletters.

Finally, some companies that don’t get coverage by Wall Street analysts try to tap local chapters of the Stockbrokers Society, a group that says it has 48 chapters and 20,000 broker-members nationwide. The society, based in Glendale, sets up meetings between brokers and company officials, with the goal of bringing new stock ideas directly to brokers and thus to their clients.

Robert Dresser, head of the society, says more small companies are discovering the group. “We’re getting calls from companies we’ve never heard of,” he says.