The real value of marketing small cap stocks

Social media, and the commission-free trading apps such as Robinhood have changed the world of stock investing and trading forever. Tangible evidence of this was seen when users from the subreddit WallStreetBets squeezed short positions and caused rallies in stocks such as Blackberry, Nokia and Gamestop- which were sent soaring to Mars. The result was popular trading app, Robinhood, halted share purchases and instituted position limits, leaving users, politicians, traders and social media groupies very unhappy with the interference. Next it appeared that the reddit community set its sights on silver. The power of communities in trading and buying stocks is staggering. But for small caps which are all too often, under-researched and undervalued, therein lies a real and untapped opportunity to finally get noticed.

But is spending on marketing and PR worth it?

There are around 1,600 smallcap stocks on the TSX.V alone and capital is fiercely competitive. Furthermore, as investing technology allows capital to travel across oceans, North American smallcap stocks are competing with stocks listed elsewhere. So when one considers that roughly 2,000 smallcaps are trading on the ASX and then there are others in Frankfurt, the AIM and OTC, one can start building up a picture of the level of competition for investor attention. Smallcap stocks grapple with a number of issues. First is the need to raise capital on a continual basis, and the second is how to deploy this capital. Advancing the project and/or business is a must and meeting investor expectations each quarter is a non-negotiable if one hopes to enjoy capital market success. As such, PR and marketing expenses are often seen as somewhat of a grudge purchase rather than an integral part of the company’s success. Moreover, management usually does not know how to measure the ROI on marketing expenditure.

How to measure the return on marketing investment?

Smallcap companies choose to spend money on marketing for one main reason, namely to expand their investor base which will hopefully translate to higher share prices and raise their company’s market cap. Therefore, one way to measure return on investment is to consider not just whether the share price improved, but to calculate the value of the remaining unissued shares against the marketing investment. However, another way to look at the value of marketing is to consider the fact that if the share price improves, then subsequent capital raises will be at a higher price. Put another way, assuming the marketing campaign is successful, the cost of capital declines considerably even if the increase in share price was incremental (10%).  Furthermore, the more capital that can be raised at a higher share price, the return on investment increases exponentially. We have provided a returns calculator which allows management of companies to input their marketing spend and cap table and calculate their return on marketing investment.

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