Your sector is out of favour—now what?

You and your team have worked hard at growing your business, focused on the fundamentals, and delivered value to your shareholders. Despite this, the market revises its view of your sector, your share price declines, and your capital cost increases. Earnings calls, which previously were opportunities to showcase your quarterly success, have become challenging as you feel you must defend your outlook and continued ability to generate growth.

While a company’s financial performance is essential to determining how it trades and is regarded by investors, macroeconomic events, and investor sentiment, even exuberance, can often impact value.

During the pandemic, we saw this with the growth in valuation in the technology sector that supported several IPOs. Post-pandemic, tech has taken a negative turn as overall growth fell short of the expectations of several prominent companies. However, this also pulled down the valuation of companies performing well. We also see this in the real estate sector with the slow return to the office and rising interest rates making cash distribution rates less attractive. In recent weeks, most companies included in the S&P/TSX REIT Index were trading below their Net Asset Value, despite many continuing to deliver positive financial results.

In the reverse of the saying “A high tide floats all boats,” negative sentiment impacts all companies in a sector, even those unaffected by challenging macroeconomics and still turning out attractive returns from a solid business. Being in this position can be frustrating. Management's success is overlooked; instead, the share price reflects the performance of the most challenged companies in the sector.

It's not unusual for management faced with such a negative outlook to throw in the towel and decide to stop their investor communications. Instead, they turn inward, focus on the business, and wait for sentiment to change. The thinking is that if investors are not hearing their story, why put in the effort?

As communicators, of course, we would not recommend that. If management is not actively communicating with investors, they lose control of their narrative and will be open to speculation on their results and outlook. We would see there are three main tasks for companies to consider when their sector is out of favour:

1. Revisit your core narrative and ensure it highlights your points of differentiation. Despite pressure on the sector, show how your company continues generating value. Do you serve a niche with continued strong demand? Do you have financial resources that will allow you to capitalize on value opportunities in the sector?
2. Engage with the sell-side—analysts, corporate sales teams, and investment bankers. These groups talk about you to their client groups or bring growth opportunities to you. Keep them up to date on your progress and continue to participate in conferences and non-deal roadshows.
3. By communicating regularly, maintain support from your core investors. Reach out around your earnings announcements and seek their feedback and current outlook on their investments. Also, consider reviewing peer holdings, find sector investors that aren’t invested in your company, and reach out to them.

A well-planned program will enable companies to preserve value, maintain a loyal shareholder base and come through a sector downturn stronger.