With the holidays just around the corner, it's time for the Bottom of the Barrel wish list: things we'd like to see from small-caps in the coming year. Throughout 2003, I've tried to maintain a list of my thoughts and readers' suggestions of what rubs investors the wrong way about small-caps. So here's a quick list of remedies based on the most common complaints.
More independent boards.
Publicly traded small-caps often grow out of entrepreneurial, family-run businesses, meaning that boards may be filled with family members, insiders and friends. While new corporate governance rules will push companies in this direction, small-cap companies should endeavor to develop more independence at the director level. In fact, every small-cap's chairperson should be a nonexecutive, an independent voice who doesn't suffer from the myopia sometimes associated with day-to-day operations.
Many small-caps lack the resources to provide the same level of quarterly supplemental data as larger corporations. However, small-cap companies use that excuse all too often to fall down on their disclosure job. Investors sometimes equate lack of disclosure with lack of performance, and more information about a company's operations means more enlightened investors. Small-caps that gripe about investor disinterest need to look first at what kind of information they're providing.
Fairness in compensation.
This is the most-often heard complaint from readers about companies, including many small-caps. Executive pay should reflect entrepreneurial investment, and it should be sufficient to attract and retain quality leadership. But compensation should be fair, relative not only to other companies, but also to other employees of the firm. Just as important, executives' benefit packages should be examined as well. When I see an executive taking big perks, I look for other excesses because mindset often starts at the top.
More investor interaction.
Meetings with investors, plant tours and conference appearances are great ways to tell a company's story. In fact, I came up with several ideas for the Bottom of the Barrel portfolio based on meetings or conference appearances. Some companies don't want to be in the spotlight, but it's easy to be accessible without sounding overly promotional.
A bit philosophical, perhaps, but sometimes companies take themselves too seriously.
grew into a national powerhouse because it was a new concept that Marcus and Blank made fun. Sam Walton always had fun growing
, and it showed in his associates. Believe it or not, these companies are home-grown, one-time small-caps, surprisingly not as long ago as you might think. I'll always give the upper hand to a company with passion, where employees seem to be committed to a vision and having fun growing the business.
This is a simplistic wish list by design. Making a business tick isn't a complicated process. For the most part, it's common sense. That's the final wish on my holiday list: In the coming year, I hope small-cap executives will be motivated by their visions and implement them with simplicity and common sense.
By looking for companies with these characteristics, the Bottom of the Barrel portfolio has done pretty well this year. In fact, the underperformers in the bunch often lack one or more of these tenets. Next week, I'll take one final look at the Barrel portfolio for 2003.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to