One of the biggest faults investors make when it comes to investing in stocks is confusing price and value. They see a quote on the exchange but don't grasp how trivial it really is. One of the strategies that has made many patient investors rich like Warren Buffett and Benjamin Graham is to think of a stock as a company with an intrinsic value that is separate from the stock quote. You should ask yourself, how much would I pay for this company per share without even thinking about how the manic-depressive stock market was pricing it. You simply buy when the price drops below its value. Its not as sexy as Erin Burnett, crunching numbers with calculus or looking for cup and handles, supports, or 50 day moving averages, but it works.

How much would you pay for a stock that has $4.69 per share in book value(assets minus liabilities), year over year revenue growth of 81%, has grown earnings to $.23 a share or $3 million from $2.1 million the year before and has bought back over half its shares over the last two years? If you were skeptical you would say, well Mark maybe that $4.69 in book value is in some inferior product on a shelf and they have no cash and a lot of long-term debt. What if $3.44 of that was in net current assets, mostly cash and investments? What if the total debt to equity ratio was very low at .12 and they had shareholder equity of $45 million and only $69 thousand in long-term debt? You might say, so a company that can grow well and is boosting earnings with buybacks should be easily worth at least its current assets right? Wrong. Envoy last traded for $2.88 per share.

I think this is a very interesting company. They were incorporated in the Province of British Columbia, Canada in 1973 as Potential Mines Ltd. Current CEO Geoffrey Genovese was with the company since its inception. I tried to dig up some quick info on the original company but came up empty handed. The Potential Mines name is interesting because of an investment Envoy currently has in Mosquito Consolidated Gold Mine (MSQ.V). Its shares have been a multi-bagger over just the past few years. Mosquito is a $56.4 million dollar company with projects in North America, Canada and Australia. Mosquito has grown shareholder equity from $2.5 million in 2005 to $9.4 million as of their last quarter this year.

What does Envoy Capital do? They provide loans and equity investments between $500,000 and $3,000,000 to publicly listed and private companies, operating in a variety of industries including media and marketing services, resources and real estate. For the twelve months ended September 30, 2007, the Company generated a return of approximately 15.7% on its invested capital. Their wholly owned subsidiary, Watt International is one of the world’s leading brand strategy and design consultancies. Envoy provides consulting, branding, packaging and retail design services to clients in Canada, the United States, Mexico, United Arab Emirates, China and South America. Watt International’s clients include: Meijer, Inc., The Great Atlantic and Pacific Company, Dubai Festival City Retail Development LLC, McDonald’s Restaurants of Canada Limited, and Wal-Mart Stores Inc. Watt also plans on opening a long-term location in Dubai and a new location in Shanghai, China to continue the recent success of the company.

An interesting thing happened around September 15, 2006. Envoy sold its United Kingdom subsidiaries, ECG Holdings (UK)Limited, Watt Gilchrist Limited and Parker Williams Design Limited. Notice the quick 35% spike in share price in early September.



The selling of the European division of Watt and the recent name change to Envoy Capital Group Inc. from Envoy Communications Group Inc. looks like a trend to focus on their core merchant banking company. It seems likely that they will sell the rest of Watt soon. The value in Watt looks like a gem hidden behind their merchant bank. Not many investors are interested in banks nowadays not to mention a small company like Envoy with a market cap of only $27.7 million. The cash they could get if they sold Watt would be about $1.50 per share making the stock even more undervalued. So, we are looking at a share price of $2.88 and asset value of over $5 per share. The value in Watt will make this an interesting stock to watch in 2008 and 2009. I think the value added by share buybacks and earnings growth or even the sale of Watt will propel the stock. The apparent separation of the stock price from the intrinsic value should eventually be reflected in the stock price.


full disclosure: long Envoy Capital (ECGI)