How Small Market Investors Are Being Wooed by Companies - The New York Times
Small investors are becoming a force in the stock market, and company executives are beginning to take notice.
After CarParts.com reported its quarterly results last month, executives at the company, which sells replacement auto parts, did what many of their ilk do: They held a conference call with Wall Street analysts, fielding questions about inventory levels, profit margins and corporate strategy.
Roughly 30 minutes later, the same executives were on Clubhouse, hosting an entirely different kind of audience. Their 2,000 or so guests had gathered at the buzzy online meeting spot to learn about the company. Their questions were far more straightforward. How did the business work? Why was CarParts.com able to offer lower prices than brick-and-mortar rivals? Were CarParts.com shares worth buying?
David Meniane, CarParts.com’s chief financial officer and chief operating officer, called the session an experiment. “We’re trying to disrupt the way people fix their cars,” he said. “Is there a way for us to disrupt how retail investors communicate with management?”
As the stock holdings of American households have soared to a record level over the past year, dozens of companies are suddenly paying more attention to individual investors. Some, like CarParts.com, are trying to transform newly minted traders of Reddit-fueled viral “meme stocks” like GameStop into dedicated shareholders. And some of those meme stock companies, including GameStop itself, are issuing new shares.
“The individual shareholder is back,” said Lawrence Cunningham, a professor at George Washington University Law School, who researches corporate governance and runs a research project that studies individual shareholder behavior. “Corporations would do well to pay attention and cultivate them.”
Small investors who buy single stocks have not been a major force in financial markets for the better part of half a century. In the 1960s, such investors controlled over 85 percent of the stock market, with most portfolios built around concentrated holdings in a few blue-chip companies.
But in the 1980s and 1990s, as people moved their money into mutual funds and 401(k)s, large fund managers and Wall Street analysts became the constituency most important to corporate America. According to SIFMA, a brokerage industry lobbying group, individual investors owned just 38 percent of the stock market in direct shares in 2018.
Such investors were growing in influence before the pandemic, partly because of the popularity of free trading apps such as Robinhood, which meshed the buying and selling of stocks with gamelike features. And companies like Tesla have long had a loud and loyal base of investors who follow the founder Elon Musk’s missives on Twitter.
But with millions of Americans stuck at home during the pandemic, the trading trend escalated. According to the Federal Reserve, American households bought roughly $211 billion in individual stocks last year — the highest level since 2014.
“Retail trading now accounts for almost as much volume as mutual funds and hedge funds combined,” Amelia Garnett, an executive at Goldman Sachs’s Global Markets Division, said on a recent podcast produced by the firm. “So, the retail impact is really meaningful right now.”
There’s no telling how long Americans will keep their pandemic-bred focus on the market. Average daily trading volume at some large brokerage firms is down sharply from its peak in January, and as vaccinations continue and the economy reopens, newly mobile Americans may be less interested in picking stocks. But companies, awakened to the power of individual investors, are seizing the moment, and finding new ways to engage with them.
“It’s forced companies to understand the importance of retail investors,” said Zach Hascoe, a co-founder of Say Technologies, a New York start-up that sells shareholder communication services to companies and brokerage firms. “Companies are seeing the opportunity to kind of tap into shareholder loyalty, tap into that passion.”
Say Technologies offers a social-media style platform that allows companies to field questions from verified individual shareholders at key corporate events. Investors can pose their questions on Say’s message board, which can then be up-voted, Reddit-style, by other participants.
Tesla, which has long eschewed traditional communications with Wall Street, is perhaps the best-known user of the service. Ark Investment Management — the high-flying, tech-focused exchange-traded fund company run by the investor Cathie Wood — and Palantir Technologies, another favorite among individual investors, have also used it.
Before Lemonade, a company that sells insurance to consumers online, went public in July, it went on a traditional tour of Wall Street, meeting big investors and talking up its prospects. However, the company has since discovered that over half of its shares are held by small investors, excluding insiders who own the stock, said Daniel Schreiber, its chief executive.
That has prompted a strategy adjustment. In addition to spending time communicating with analysts whose “buy” or “sell” ratings on the stock can move its price, Mr. Schreiber said, he has made a point of doing interviews on podcasts, websites and YouTube programs popular with retail investors.
“I think that they are, today, far more influential on, and command far more following in terms of stock buying or selling power than the mighty Goldman Sachs does,” Mr. Schreiber said. “And we’ve seen that in our own stock.”
Academic research suggests that over the longer term, it can be a competitive advantage for a company to have a patient base of investors who understand and believe in its strategy. Such a steady foundation makes it possible for executives to focus on longer-term strategic goals, rather than meeting the short-term metrics often dictated by Wall Street analysts, said Mr. Cunningham of George Washington University Law School.
Take Amazon. Its share price kept rising over the years, despite its skimpy and unpredictable profits and widespread skepticism from Wall Street. The individual shareholders who held Amazon stock bought into the vision of the founder, Jeff Bezos, and saw no problem with Amazon recycling its enormous cash flows back into the company rather than paying dividends. Many of those shareholders are now rich; someone who bought $1,000 worth of Amazon shares at the start of 2000 would be sitting on more than $4.3 million today.
Shares of Tesla, too, have exploded in recent years — a victory for its base of cultish followers, who believed in the company’s prospects despite years of losses. Over the past five years, Tesla shares have gained more than 1,300 percent, creating $640 billion in market wealth.
While some companies are pursuing the loyalty of small shareholders, others are pursuing their money. Several companies whose stocks climbed during January’s “meme stock” boom have taken advantage of the demand to issue new shares, turning trading enthusiasm into actual cash for the company. (Previously issued shares that are bought and sold in the open market don’t generate any new money for companies themselves.)
Last week, GameStop announced it would sell 3.5 million new shares, which would allow the company to collect at least a little of the cash that traders have been throwing at its stock. The money — around $500 million at current prices — would be used to help pay for the chain’s efforts toward a digital business model.
The hydrogen fuel cell maker Plug Power pulled off a similar maneuver in late January. A favorite of new traders who had pushed its share price up 400 percent in three months, the company pocketed more than $2 billion by selling new shares. AMC Entertainment, the movie theater chain popular with small traders, also raised around $917 million in January, including about $500 million through the sale of new shares.
Some company executives are even cashing in personally. Executives at Koss, a small Milwaukee-based headphone maker whose shares are also popular with retail investors, sold significant chunks of their holdings. In one week in February, Koss insiders sold about $44 million in stock. Michael J. Koss, the chief executive and son of the founder, sold shares worth more than $13 million, according to a regulatory disclosure.
CarParts.com, the company that used Clubhouse to connect with potential shareholders, will continue to pursue small investors, Mr. Meniane, the finance chief, said. The effort is already informing how the company thinks about its product and the story it presents to investors, he said.
“I spend a lot of time talking to institutional shareholders, and you know a lot of them understand the business, but they spend also a lot of time building financial models,” Mr. Meniane said. “Whereas when I talk to retail investors, specifically on Clubhouse, it was all about the underlying business. Like, they’re trying to understand what we’re doing.”
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