Thanks to the help of our readers, we thought we would take a moment today to revisit one of our recent efforts fight past the hyperbole of company announcements and look at what is really going on.
In this instance, DR reader Ray Reimer reminded us of the hype that surrounded Australian customer loyalty card company Oncard International. As you may or may not recall, the buzz around this Aussie company was the news that it had developed a strategic alliance in China for the supply of its loyalty card services.
We were told that it was attractive because it would receive a whole bunch of cash in return for exchanging it into various rewards. The kicker was that if rewards went unclaimed then Oncard got to keep the cash.
That, apparently, seemed to be that. However, it was good enough for the share price to rocket from 20 cents to 50 cents in a matter of days. Perhaps we shouldn't be surprised to learn that now the hype has faded, the company's share price has slowly edged down to 42 cents.
DR reader Ray adds to our comments by saying, "I believe it to be considerably misleading... when the Chairman highlights... that they have in excess of $60 million in cash reserves." His reason? "This is particularly relevant when there is a corresponding liability attached to those funds."
We are sure that Oncard International is not, and will not be the last company to talk up one side of the balance sheet. How many other companies out there have we heard extolling its cash balance, only to find out in the company report that the cash has been either raised from an equity offering or borrowed.
And Oncard certainly won’t be the first or last to be spruiking its shares on the stockmarket. We've mentioned it before, but the surest sign that things are not all that they seem is when the average shareholder starts believing everything the company has to say. Comments from shareholders such as, "This could go to $10 [when it is currently trading at 50 cents] based on their reserves" are a more than regular occurrence in the market, especially connected to resources companies.
Because of course, as we saw with Cudeco last year, there is absolutely no correlation between a Director holding company options and a sudden ramping up of the share price!
One could reasonably argue that if the company truly does have the reserves that they say they do, then why would a Director be so keen to rush to sell their options at the first moment that the price spiked? Surely if it's genuine, and the price represents longer term fair value then the Directors should be keen to hold on and hope for even bigger returns.
Not likely is it?! As the time honoured phrase goes, Caveat Emptor. Or maybe it should be "Beware of the Seller."
Kris Sayce
for The Daily Reckoning Australia
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About the Author
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.
Comment by michael on 29 March 2007:
Re the Cudeco and OnCard hype, you've gotta treat it for what it is - short-term speculative hype, and profit from it.
First rule: speculate on such stocks with money you can afford to lose.
Second rule (which follows the first): keep your 'investment' to a minimum.
Third rule: stay very short term - maximum 1-2 days, because the party will end.
Fourth rule: if you make a healthy profit, take your money and run a mile.
Fifth rule: if you've crystalised a good profit, don't buy back in the short-term no matter what happens - you're likely to lose it all again.
Sixth rule: if you take a lose, bite the bullet, take a lose and save what money you can, and DON'T average down - ever!
In Cudeco's case i invested $6000 @ about $3.70 and after one day doubled my money and got out. Unfortunately i broke the fifth rule and second guessed myself and in the end only made a 50% capital gain or $3000 in one day.
In OnCard's case, i invested about the same and 24 hours later jumped out with a $1500 profit, and didn't jump back in again.
In another case, QuickStep, i did the same and made a healthy profit, but have also started investing it in again at around 45c because it has a very good story. So is Oncard's, i think, so now, at 40-odd cents, might be a good time to start buying again.
michael
Comment by A concerned Investor on 24 May 2007:
This company got its investments in Asia through illegal transactions led by a Company called FCP and its Principal Andrew Waters. It apparently stole the businesses that it folded into oncard international from the original founders of the business. I think who ever invests in this company is looking at some huge losses down the track
Comment by An insider on 8 August 2007:
I am one of the original founders. The comment by "concerned investor" regarding FCP and Andrew Waters is rubbish.
Comment by Christine on 12 June 2008:
I have read your remarks about Oncard (admittedly written last year) but have also checked their Annual Report and accounts for this year and last. Your article and their accounts bear no resemblance to each other as their accounts show very strong growth.This is certainly not reflected in the share price which is now a good deal less than half the 40 c you were referring to.
Are their glowing annual figures orrect or is your pessimistic forecast correct? How does one know! And if their figures ARE correct as I assume they are why has the share price sunk so low?