When the Securities and Exchange Commission severed the ties between brokerage house research and investment banking, firms gutted their budgets for small-company coverage, leaving most microcaps as orphans.
At CTI Industries, President Stephen Merrick says that New York firms such as Sidoti that once wrote reports regularly have dropped CTI. “The calls I get are from investment bankers who want to take us private or find somebody to merge with us,” he says. He adds that the great advantage of remaining public is that “we can retain top executives with stock options. If we were private, there would be no market for those options.”
As a testament to how far some microcaps can fall, Warrenville-based Fuel Tech, which develops systems to lower emissions from coal-burning plants, had a dozen analysts following its stock a decade ago, when shares traded as high as $38.20. Today the stock trades at $1.57—its market cap is $36.4 million—and a single analyst has maintained coverage. As customers have switched from coal to clean-burning natural gas, Fuel Tech's products are losing currency. “We attracted a lot of market interest at one time,” CEO Vincent Arnone says. “But the world and markets are very different today.”
Many of the smallest companies have older management, further dampening investor interest. CTI's Merrick is 74, while Chicago Rivet Chairman and CEO John Morrissey, who has been on the board since 1968, is 80.
O.B. Parrish is chairman and CEO of Female Health in Chicago, which produces a female condom mostly marketed in developing countries for AIDS prevention. He is 82 with no immediate plans for retirement. He has paid analysts for years to write invariably optimistic research reports on the company that are distributed to investors, but the stock was stuck around $1.56 recently, yielding a market cap of $45 million.
Parrish has no regrets for taking the company public in 1999. “We raised about $6 million at a time when banks wouldn't lend to us,” he says. “Without issuing public stock we probably wouldn't be here at all today.”
Female Health trades 75,000 shares a day, too few to interest institutional investors, says Alexander Paris Jr., president of Barrington Research Associates in Chicago. “For these microcaps, it's tough for institutions to trade in and out of the stock. That means that investors have to take a long view of the company,” he says.
Nevertheless, most microcaps forge ahead with the hope they will rise again into the ranks of small-caps, Paris says: “If the company has a good story and executes well with earnings growth, the stock price will eventually rise. The problem is that in the world of microcaps, 10 percent growth won't catch anybody's attention. You need more like 50 percent growth. And that's not easy for anybody to achieve.”