Monday, January 3, 2011

Envoy: The Backward-Looking Forward-Looking Statement

One of the problems with small-cap investing is that the financial reports come out much later than they do for large-caps. Auditors will first spend time on the large companies which pay the large fees, and small-caps don't appear to have the manpower to generate reports quickly. Some small-caps make up for this by providing an update on the current quarter when they relay their previous quarter results. But others, like Envoy Capital Group, leave shareholders completely in the dark.

Envoy Capital Group has a net current asset value of about $15 million, but trades for about $7 million on both the Nasdaq (under ECGI) and Toronto Stock Exchange (under ECG). Due to the large discount at which it trades to its assets, Envoy has already been discussed as a potential value investment on this site.

The company's fiscal year ends on September 30th, and the company does not release its 4th quarter results until it releases its annual report. Therefore, only last week did the company release its results from September 30th, meaning investors had to wait about 2.5 months after the end of the quarter to get the company's results.

Unfortunately, despite this, the company has offered no insight into how the current quarter (which is more than 80% complete) is going. This may be understandable if the company's operating situation were difficult to ascertain (for example, if revenue recognition was subject to the completion of various milestones). But for Envoy, the most important element of the company's financials is the current market value of its trading portfolio. Surely, it doesn't take much to provide an update on the portfolio's securities!

Instead, the company provided the following outlook:

"...the investment landscape in the near future may present some good opportunities."

In the near future? What about the near past? Is management speaking to its prospects for the current, almost-complete quarter, or is it simply ignoring the last 2.5 months altogether and instead speaking about the next half-month?

Further clouding this issue is that there have been a couple of important occurrences since September 30th that management did not raise as a "subsequent event". For example, one of Envoy's holdings from last quarter (Augen Gold) increased in market value by 150% since the end of the quarter. But whether Envoy still holds those shares is anybody's guess!

Small-cap companies often lament that they trade at discounts to their larger peers. But one of the likely reasons for this is the lack of disclosure that small caps provide. Some disclosures come at a cost and are therefore prohibitive; but when they are not, small-caps would be better served in providing information that would be of benefit to shareholders.

Disclosure: Author has a long position in shares of ECG


Anonymous said...

What do you think of this analysis of ecgi?

Saj Karsan said...

Hi Anon,

I think it's a good article that raises some important points.