How Not to be an Orphan Company

"Don't have a corporate presentation with a black background" and other tips

Ryan Floyd

Feb 09, 2024

Over the last 20 years seeking to do business in almost every corner of the world, many corporate managers have asked me how their business can emerge from so-called “orphan” status and engage with the world (including one who wrote me today!). In response, I am providing a list of tips here that any company, regardless of size or location, could use to emerge from orphan status, a financial state where few investors care about a given business. While many of these suggestions also apply to private companies, the focus is primarily on public businesses. I welcome any additional suggestions for the list.

Investor Engagement:

• Empower someone to answer inbound e-mails, particularly from actual and potential investors. Sounds obvious but doesn’t always happen.

• Please don’t use a black or other dark background on investor or other printed materials. Some of us still use a printer.

• Have a quarterly investor presentation and make it easily accessible on your website.

• Write a meaningful note inside of the annual report about what has and hasn’t worked recently in the business. Candid communication will draw out the kind of investors that you want.

• Host a quarterly investor call even if no one is on it. Record it and place the transcription on your website. Try to get these transcripts on Bloomberg, Refinitiv, Capital IQ, and or FactSet.

• Don’t host investor calls between 10:30 pm and 5 am, New York City time.

• Attend at least two investor conferences in a year.

• Have a relationship with global proxy advisors, and perhaps run some of the possible resolutions by them so you don’t risk many unsuspecting “no” votes for a simple resolution.

Financial Transparency and Reporting:

• Have financial statements in English because it is the world’s global language, for better or worse. I can read Hindi, German, and Spanish passably, but I don’t know

• the word for “Leasehold Interest Capitalization” in any of those languages. If printing financials in English is impossible, at least make sure, please, that the annual report isn’t scanned, so we can try to translate the text.

• Publish full financial statements quarterly even if the exchange only asks for half-yearly or yearly. Increased disclosure enables shareholders to stick with you when the world faces inevitable volatility because they understand the business better. Otherwise large moves in the stock price make investors fearful for insider trading in places with only half-yearly financial reporting.

• Publish financial statements within 45 days of the end of the period.

• Use segments in financial reporting to differentiate between different parts of the business. It’s alright if one segment is much higher margin than the other. Try to give the segments names that correspond to reality.

• Use the words “free cash flow” and “free cash flow margin” in the investor presentation. Use it as a KPI internally. You can calculate this as EBITDA – capex – investment in intangibles – changes in working capital – share based compensation (if it isn’t inside of EBITDA) – leasing costs. Describe how you plan to use free cash flow in printed materials. This sounds easy but is rarer than you think.

Capital Management and Efficiency:

• Actually buy back and cancel shares if you think your stock is cheap at market prices. Companies usually think this will reduce liquidity. Buybacks often seem to

• improve liquidity because you create a bid in a stock that doesn’t always have buyers and sellers every day. The point is to make smart investments, not to “support the stock.” I’ve seen a company with a market capitalization below $75 million buy back more than 20% of its shares. It can be done.

• Have a policy to return free cash flow to shareholders or make smart, accretive

• acquisitions. I have seen policies to pay 85% of free cash flow in dividends,

• buybacks, or paying down debt over a three- or five-year period. That’s a good

• start.

• Have reasonable executive comp: don’t pay senior management $1 million a year when the market cap is below $50 million.

• Limit Related Party Transactions. When in doubt, buy those widgets or rent that office space from a third party and not your cousin.

• Try to improve receivables and days of sales outstanding. Often smaller companies have overly high net working capital which takes away too much free cash flow.

• Don’t keep 3x annual expenses in cash on the balance sheet. You may think it protects you from a downturn, but investors may think that it suggests increased risk of a fraud.

• Give 3-5 year targets you can hit. It helps investors visualize where the company is headed. Then hit those targets. Repeat.

Disclosure and Communication Practices:

• Try to optimize the “data ink” ratio in printed materials, which is the amount of data / amount of ink on the page—the higher, the better. (Special thanks to Edward Tufte for the term.)

• There’s no need to summarize the global economic climate, global GDP growth, FDI figures, and monetary policy in the annual report. Save the time. Investors can just find such information on the IMF’s website rather than your printed materials.

• Make graphs of customers, units, and volumes over time in the investor presentation. Use as much history as you can. Also show revenues and profits per unit of volume if possible.

• Publish details around acquisitions and deals publicly. Too often the deals have too few metrics.

• Publish organic growth figures if company has made acquisitions during the period.

• Describe how capital investments are made somewhere, whether on your website or in each investor presentation. Do you have a hurdle rate of 20%? What inflation rate does that imply? Do you evaluate projects after the fact? What has your hit rate been historically?

• Disclose the terms of management bonuses. Otherwise you risk investors voting against shareholder resolutions.

• Show revenue growth net of inflation for the current period and also over history. In an age of higher inflation, nominal growth rates are hard to visualize. Five percent revenue growth with seven percent inflation is very different than four percent growth with one percent inflation.

• Hire a sponsoring broker to have at least one sell-side broker covering your stock. It increases transparency.

Many of these are free. Some may cost a little bit of money. In each case, they will improve the exchange with the global investment community. This, in turn, will reduce the company’s cost of capital. Also, improved disclosure will help the company have a more stable base of investors who can withstand temporary periods of volatility and uncertainty. If a company is a complete orphan without any natural set of investors, applying each of these suggestions may seem like a monumental task. I would humbly recommend implementing them one by one. You may be surprised at the change in tone from investors with each three you execute.

This document is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any securities or investment advisory services. I am the Portfolio Manager of Barca Capital, LLC, but the views I express are my own not necessarily those of my firm.