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.”
for The Daily Reckoning Australia