Originally posted on Forbes, February 2022
The S&P 500 fell into correction territory in the first month of 2022, and the CBOE Market Volatility Index approached its 52-week high in late January. The stock market’s recent volatility signals a need for preparedness from publicly traded companies’ executives and investor relations teams.
A volatile share price can be difficult for any company to deal with, as it can make raising capital and finding the right investors — two key objectives of any publicly traded company — more challenging.
Share prices can never be entirely in your control. The pandemic’s continued impact on the economy, rising inflation and the Fed’s decision to raise interest rates have implications for financial markets and performance. However, issuers can consider various investor relations (IR) tactics to help minimize volatility, especially as the market continues to swing.
Beta and share price volatility go hand in hand, and before reducing volatility, it is essential first to understand your beta. Beta is a measure of a stock’s volatility in relation to the market and can be calculated on a sector or security-level basis. It is calculated by taking the covariance of the return on a stock and the return on the market and dividing it by the variance of market returns over a specified time period.
Making good use of stock surveillance can help issuers combat volatility, especially in thinly traded markets. With traditional filings, you could go months, quarters or more without knowing who is buying or selling your stock, so surveillance is the de facto method to know about significant shareholder movements on a more frequent basis. This is particularly valuable for companies where beta can be significantly impacted by large position changes from institutional investors.
Having a strong shareholder surveillance system in place allows you to better understand the motivations behind these decisions and prepare you for when this might occur in the future. Knowing who and when someone is trading your stock can help you better understand why it was traded.
For example, say you are a small-cap oil and gas company, and there has recently been a sizable sale by an institutional investor. By understanding that investor’s mandate and analyzing similar trades within their portfolio, you may be able to better understand if the decision to sell was idiosyncratic — specific to your company only — or if it was part of a broader sector exposure reduction, in which case there would likely be other similar sized trades at many of your peers.
Once you have stock surveillance set up, your strategy for mitigating volatility relies upon the relationships you have with your investors. For example, suppose you are an executive, investor relations officer (IRO) or IR consultant. In that case, you should always do your due diligence in communicating regularly with shareholders so you may already have an idea of who is interested in increasing their position.
Those shareholders should be visible in your IR customer relationship management (CRM) system if you employ a proactive investor engagement strategy. There are a variety of relationship management tools that allow publicly traded companies to grow, understand and monitor relationships, which ultimately can lead to stronger relationships with investors and a more entrenched shareholder base.
Having a detailed and organized IR CRM system lets you better leverage investor contacts to help arrange a potential buyer/seller should you suspect that one of your shareholders is planning to make a material position change. Through investor targeting, issuers can target investors that understand their industry and are more likely to be partnership-oriented, long-term and aligned with company management.
Targeting and cultivating relationships with the right investors is key to ensuring stability in your share price, diversifying your shareholder base and improving liquidity. When shares are held by a diverse group of long-term-oriented shareholders who understand your business and believe in management, it becomes increasingly difficult to move the share price leading to a less volatile stock, a lower beta and ultimately a lower cost of capital.
The best way to structurally reduce volatility is to find long-term, partnership-oriented shareholders who hold the stock and do not sell frequently.
Explore Irwin's unique investor targeting system.
All else equal, a more liquid stock trades more frequently, is usually more closely followed/understood and tends to be more efficiently valued by the market. Thus, the beta of said stock will be a more accurate representation of the true volatility levels of the shares relative to the market. This is important to understand because beta can fluctuate quite significantly, particularly as you move further down market cap size.
With CRM, shareholder monitoring and investor targeting, public companies have a range of tech-enabled tools they can leverage to enhance liquidity by building relationships with investors, connecting buyers and sellers, and making sure their company story is effectively conveyed.
It’s possible to do everything right and still have a high beta. If there are particular attributes or business decisions that contribute to volatility, you should address these in your investor materials and be prepared to discuss them with concerned investors. For example, if you are a newer business in a comparatively mature market, your beta may be higher than the rest of your sector. In this case, it’s appropriate to call out these differences and address what you are doing to strengthen your position in the market.
While there are a number of factors outside your control that affect your beta, it’s still possible to reduce volatility in your stock price with a thoughtful and proactive approach to investor relations. Employing stock surveillance helps you get ahead of major changes before filings data becomes available, and a proactive investor engagement strategy can help you better arrange trades within your IR CRM.