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Why small company stock prices fall - even on good newsPosted by securities on: 2006-04-30 15:53:06
Why small company stock prices fall - even on good news Gerard Brandon As a shareholder and director of a small public company I am often asked why the share price has fallen even when the newsflow is significant and positive. I too have been excited at the prospects of good news and frustrated at the way the market has been treating the share price of some of my investments. I have sought to find ways to explain to myself the reasons at some depth and have come up with a few, of which I am not sure any or all may be responsible. Entrepreneur of the Year finalists There are shares that are affected by external economics, such as exploration and alternative energy technology companies when oil prices rise such as Tullow Oil for instance, run by Entrepreneur of the Year winner - 2005 - Aiden Heavey of whom I had the priviledge to share the same catagory as finalist of Entrepreneur of the Year myself. A worthy winner and exceptional individual, I wish him every success at the Ernst & Young World Entrepreneur of the Year final next month in Monte Carlo. Nothing happens overnight and Aiden built his company over a period of 20 years to where it is a significant player in Oil and Gas, yet remains a small company with a very high share price reflecting the price of oil and his and his teams' shrewd investments over the years. On the other hand there was of course the internet bubble a few years ago that seen shares rise to extreme heights on hype almost over night only to flounder on a realisation that gravity works even on excessive expectation. Blue Chip companies out of favour Then there are the blue chip mega drug firms who have grown on the back of blockbuster breakthroughs only to drop as fast as the patent expires. These represent less than 2% of all stocks traded on the stock markets around the world. The headline companies that are read about every day in the news. Profitable small companies Small companies grow to be profitable and the financial world has yet to beat a path to their respective doors. Not because of the lack of great science, not because of the lack of great management, but simply because of a steady build up of technology that creeps into the market system and finds itself being used in many many places around the world. Mostly because they fall below the Investment Institution radar. Investment companies are rarely given a glimpse of the value of what is inside many small companies. The smaller it is the less interested are the investment funds with 100's of millions to invest. So it is down to the day traders who get bored with the lack of volitility and simply move on. Momentum investors Another theory is momentum. If the price is dropping, less people are interested in buying, so they wait (that is if they know about the share in the first place). Property Speculation Finally there are the facts of property speculation by the small potential investors. For instance if you had 20,000 euro to invest in Ireland 18 months ago and you put that into a buy-to-let apartment today you could sell it and realise a 100,000 euro profit. Put that into a small speculative, loss making, company and you could have a loss on your hands. There has been property bubbles after every equity bubble as people flee from equities to a more secure investment. This was true of the 1987 stock market crash that drove the property prices up in London, only to see them crash in 1992. Investors always flee in the opposite direction and are predictably cyclical. Internet Bubble After the 2000 internet bubble - technology equity crashed and people ran for cover in property. Such is the case that prices are at an historically high price/rent ratio. So even though a company maybe cashflow positive, even though the technology is sound, the science is proven and the number of partners using it continues to grow. Even though the management put 150% into finding ways to increase shareholder value, the market has created a vacuum in funding for smaller companies. Good news may continue and shareholders will read about it and decide it may be a worthwhile investment and as secure as any speculative investment. Small companies are not for the faint hearted It may take some time. Small companies are not for the faint hearted. Good ones with great management can be something to put away for longer term upside. The market will eventually realise this and then momentum hopefully will gather and demand outstrip supply of the shares and the result positive for all. The Guru Manager suite of support services was built to assist Entrepreneurs start and grow their businesses. Building a business from zero and getting it to a public company has a less than 0.006% chance of survival. Public companies are responsible to the owners, even those with a single share. Employees, Management and shareholders are looking for the same thing - a future If you know the science, technology, business model is sound. If you know the management are exceptional and capable, then sometimes it is necessary to use your gut to direct you to look at a company and say it is worth a punt..... Remember as a shareholder the people who run and are employed by small companies know the value of their jobs and work to build the company for themselves and for shareholders future. About the author: Gerard Brandon is Editor of Gurumanager. Founder and former CEO of Alltracel Pharma Plc 1996 - 2004 that included an IPO in 2001. Former Investment Fund Manager. He is an innovation consultant and chairman of Allenville Finance Inc, Gerard was a finalist in the Ernst & Young 2005 Entrepreneur of the Year. |
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