Seven months ago, Envoy Capital was brought up on this site as a potential value opportunity. Today, the stock price sits some 60% higher, even though the value of the business has actually declined over this period. This was no fluke. Investors who paid attention saw a situation where upside potential clearly trumped downside risk, thanks to a massive margin of safety.
Envoy Capital traded for just $8 million despite net current assets of $16 million. Most of the current assets were in cash or various market securities. The company protected its portfolio to some extent by purchasing put options on the general market, which can be a drag on returns but adds a level of safety. In addition, the company has over a million dollars worth of real estate property in Toronto.
Management clearly recognized the disparity between the company’s price and the value of its holdings. As such, it initiated share-buybacks and followed through on many of them, raising the value of each share in the process (thanks to the large discount to book value).
Furthermore, there were signs that the market value of the company’s securities was worth more than its stated value. This was due to the fact that one of the company’s holdings showed strong price appreciation before the company announced its latest results. Based on the company’s price action, the market appears to have only caught on to this after Envoy’s results came out, allowing astute investors the opportunity to profit ahead of time.
Finally, what gave the company’s price its final push toward intrinsic value was a private sale of 19% of the company’s shares to a new management team that is taking the helm. The price the major shareholder received in the transaction was $1.55/share, which is still far below the company’s book value (as of its latest financials) of $2.18. However, the company also announced a restructuring of about $0.70 per share, most of which will likely take the form of cash payouts to the ousted management, since the company doesn’t have a lot of fixed assets to write down.
As such, the private stock transaction took place at about the same price as the company’s new book value after taking the “restructuring” costs into account, which is about what you’d expect. But the shares currently trade a little bit above that level, offering current investors the opportunity to get out at a fair price.
Over the years, shareholders in Envoy Capital have lost a lot of money. However, those who invested when the price traded at a significant discount to its value (which has been possible for most of the last year, including just last month) managed to make a ton. Now that cash should likely be pulled out and deployed towards the next opportunity.
Disclosure: No Position
