Sick Of Being Undervalued? Read This

Ben Williamson
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Sick of being undervalued? Read this

A normal consumer brand turning over ~$50m in revenue will typically spend 5-8% of its revenue on marketing. That is around $3-4m a year broadening the customer base, increasing revenue opportunities, increasing sales, driving short-term demand, and building long-term brand equity.

As I wrote about last week, a listed company is both an operating business (i.e. “The Company”), and a security (i.e. “The Code). Compared to the Company, the marketing budget for the Code is typically very, very, very small.

Yet time and again I talk to executives who have underinvested in their Code budget for years and wonder, “why are we so undervalued by the market?”

My response? There’s no such thing as “fair value”.

“Fair value” doesn’t exist

Nothing on the market is fairly valued. Every stock is either undervalued or overvalued. Here are some common scenarios that dismiss the idea of “fair value”:

  • A stock moves +/- 10% in a single day with no corresponding influence from the Company;
  • The existence of short sellers and day traders;
  • A company can raise capital, have more cash to hit their targets, and still drop in value.

If there is no such thing as “fair value”, then the CEO or MD is left with only one choice for the Code’s strategy: be consistently overvalued.

The superpowers of overvalued stocks

Overvalued stocks are fantastic. Especially overvalued growth stocks. Their superpowers include:

  • The ability to raise more cash: a $100m market cap stock can raise more than a $20m one can
  • The ability to attract more investors: success breeds interest
  • The ability to spend more cash: raise more, spend more, outcompete other stocks, and feed more capital into the operating company to generate more results
  • The ability to become self-sufficient: eventually, raising capital becomes a thing of the past

How to get your superpowers

Ok - so since you’re here, I’m assuming you’re gunning for “overvalued” status. Here are three items to start with.

Have clear ownership
Whether it is the CFO, a Chief Shareholder Officer, or the CEO, you need a C level executive to have ownership of the Code. It should be clear who owns it.

Another option is to create a separate division in the company who report into the CFO or CEO (called a Markets Division). Have someone run this internally.

Set a budget for marketing the Code
Here is my guide for code budgets. Included in this should be your spend on internal people, external advisors and promotional spend.

On an annual basis, based on market cap, you should be spending at least:

  • Sub $10m market cap: At least $100k p.a,
  • $10 - $100m market cap: 1.5% of your market cap (i.e. $600k for a $40m company); and
  • Over $100m market cap: At least $1.5m p.a

Remember you have 2,400+ competitors out there for the same investor dollars, it isn’t easy but it can be straightforward.

Set SMART goals based on your market cap
Don’t be a $10m company who spends all their time pitching institutions who are too big for you yet. Set goals to move you up the ranks and be specific about it.

Set regular, smart goals on a quarterly basis like:

1. Gain 3 investors for every 2 who churn over the next year

2. Add video content to every market sensitive announcement

3. Increase turnover on a weekly basis by 25% by next quarter

4. Increase market cap by 20% in the next 12 months

5. Centralise investor questions

6. Increase our email distribution list to 3,000 with at least 100 brokers or institutions

If you do these three things then attention will go to the right activities. The market will hear more about you, you will out compete other listed companies.

Most importantly, with a bit of time and investment, you will stop being undervalued.

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