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Robin Sundstrom lectures on valuation at Seneca - March 2014

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Good Trading Liquidity is Not a Matter of Luck

IR people hear the same complaint about many small-cap stocks. Portfolio managers, brokers, and traders alike will tell us, "There's no liquidity.", "It trades by appointment.", "If I want to trade it, I almost have to arrange a buyer myself.", "It's too illiquid for me to buy."

It's one of the biggest problems faced by the small-cap sector.

Often, these stocks don't come close to turning their float every year (every IR person's basic goal) " they just don't trade enough. New listings, especially, suffer from the disease, unless they're lucky enough to be one of those "flavour-of-the-month" stocks.

But wait just a minute. Are these stocks really just lucky? Not a chance.

Liquidity has nothing to do with the exchange your company trades on. Although it does on some levels relate to the company's size, sector, or sponsor, it has nothing to do with luck. Orphan stocks appear on all exchanges - though ones with dedicated market makers, such as CNQ, can help with this. But regardless, liquidity arises from getting out a good story and selling " not just telling " that story to active investors.

You might say that liquidity is a function of loquacity.

If you doubt this, consider a couple of examples. During the years (and years, and years) when gold was in the dumps, Rob McEwen held regular investor lunches in his office, no matter the news. As a result, his company, Goldcorp, had consistently stronger valuations than most of his market peers, even before the company began to pull significant gold out of the ground. People felt they knew management, knew the stock, and developed a comfort level with the company. Throughout McEwen's time at the helm, Goldcorp traded well, with solid volumes, despite gold being in disfavour.

More recently, Medipattern a small medical imaging software company traded on the TSX-V, got a terrific response to some news about a contract with GE Healthcare " something they had told investors about at length so that the market was well aware and ready to trade once the deal was signed. On the CNQ stock exchange, it is no surprise that mining companies are consistently among the top traders. Mining companies' managements know they have to get out and tell their stories through good times and bad simply to survive downturns in the commodity cycle,

It's not rocket science, just persistence.

So yes, there are many elements affecting liquidity, including:

Obviously, most of the above are just not things the IR officer, or even management, can easily affect. But one thing is well within reach: the company's story. Shape it, tell it, sell it, and follow up with your audiences.

The process is straightforward.

Refine your message. This should be done on a regular basis, as stories can get stale, and strategies that fly one year can flounder the next. Craft your presentation. Focus on your audience, poll them so you're aware of their needs and biases, and as far as honestly possible align company plans with audience needs. Make it crisp, compelling, and informative, but don't kill the listeners with details " you're looking at a 20-minute delivery time, which when you come to think of it is far longer than most of our attention spans. Practice delivery. This is important. The person who is delivering the presentation needs to know it cold, including the numbers. This can be a solo show or a shared task, with the CFO, for example, delivering the financial part of the presentation. Make the calls. Use the company's database, but work to expand it through management connections, friends, referrals, and general networking. Most people know the ropes and are ok with getting the calls. It's the only way to build the company's contacts. Sell your story, don't just tell it. If the person delivering the presentation doesn't come across as a believer, why would any of the audience decide to buy the product? This is a marketing show, and the product being sold is the company's stock. You have to make the value proposition for investors. Follow up. Find out what the audience thought and use the feedback to improve the presentation and delivery.

Follow these guidelines, and I guarantee that liquidity will improve, regardless of all the other variables. Others will be asking you how your company got so lucky, but you'll know " it is not just luck.

CNQ Monthly Review - March 2008