June 6, 2019

by Arthur Stupay

The looming trade war between U.S. and China has taken a big toll on middle-market value stocks, which have plummeted in price compared to tech stocks. It has also altered valuation measurements such as price/earnings ratios and price-to-book, with many stocks selling at 5 times (or even lower) expected 2019 earnings and well below adjusted book value. It is apparent in equities of most metals, equipment, metals processing, as well as specialty chemicals and even banks.

What can middle-market companies do during this downward revaluation of earnings multiples especially in relation to tech stocks, many with limited sales (and no earnings), triggered in part by the looming trade war?

Not every public company gets adequate coverage. There is vast underreporting or lack of communication from middle-market companies. A strategy aimed at increasing the level of communication via frequent meetings with investor groups and analysts ― not necessarily linked to brokerage houses ― will help, as well as additional external presentations, interviews and opinion blogs. This is a time for telling the full story, emphasizing the company’s economic value, highlighting book value, cash flow and earnings outlook. Even a fully developed annual report may come back into play to complete the picture.

In short, public companies, especially established middle-market companies that are too easily taken for granted, have to make time for current investors and educate future investors. It is clear that they will get little help from existing market-makers.

Here are six ways to improve middle-market company valuations during these challenging times.

  1. Schedule investor trips to meet with existing institutional shareholders and brokers, including regional firms, who could have interest in the stock.
  2. Increase media relations efforts to get the company noticed by local and national media, especially The Wall Street Journal, The New York Times, CNBC, influential regional business media and other outlets. This may require more frequent press releases on new products, business expansions and end-use market trends. Strengthening the link between investor relations and media relations could have a significant positive impact on company valuations, given how fast news ― even good news ― travels today.
  3. Increase social media and blog content, explaining recent company activity and the potential of recently introduced products or acquisitions. Same as #2 above, announce positive developments move your news faster through smart use of owned media.
  4. Highlight company benefits from “fair trade” rather than “free trade” with China and other low-wage countries.
  5. Discuss how your company contributes to the current wave of innovation in the U.S., such as 3D printing, recycling and climate-friendly manufacturing and products, even blockchain applications and digital currency.
  6. Emphasize smart innovation that feeds into current news, such as environment-friendly products or those that improve efficiency or health.

Dix & Eaton can assist in this process by identifying investor groups and current investors by city. We have vast experience in developing messages for investors, and a strong capability in social media strategies and media relations. Contact me to learn more.