Big Fight Brewing, Big Gains Accruing

Market Buzz – Big Fight Brewing, Big Gains Accruing

A week that appeared destined to extend the 7-week rally experienced since early February was derailed early as legendary investment bank Goldman Sachs Group Inc. (GS:NYSE) was charged with fraud by the U.S. Securities and Exchange Commission (SEC) regarding the marketing of a debt product tied to sub-prime mortgages that was designed to fail.

The lawsuit is the biggest crisis in years for Goldman, which emerged from the global financial crisis as Wall Street’s most influential bank. Goldman shares dropped as much as 15.6 per cent and are currently off more than 12 per cent. The broader markets also fell after the news.

Goldman immediately defended itself, vowing to fight the SEC civil suit. Goldman officials were quick to state that the SEC’s charges are completely unfounded in law and fact and they will vigorously contest them to defend the firm and its reputation.

As the big boys squared off for what may be the fight of the year, one of our top rated small-caps over the past year reported some great news over the past week – particularly for shareholders who bought into the stock on our recommendation in June 2009, when the stock traded at $11.00.

The company, World Point Terminals Inc. (WPO:TSX), has been involved in the business of bulk storage and the transshipment of various liquid products and related activities.

This past week, World Point announced that it had entered into a binding letter of intent with World Point Holdings, Inc. (Holdings), an entity controlled by the Novelly family, pursuant to which the company has agreed that Holdings would, through a series of transactions, acquire all of the issued and outstanding common shares in the capital of the company. Pursuant to the proposed transaction, shareholders of the company who are not also shareholders of Holdings would receive US$19.90 in cash (equivalent to approx. CAD$20.01 at today’s exchange rate) for each World Point common share.

At US$19.90, including the extraordinary dividend of US$0.50 issued in December (still not factoring in regular dividends), the gain on the stock is currently 85 per cent and 80 per cent at the going private transaction price and current price respectively – all this in less than 10 months.

Looniversity –Paper Profits – Unrealized Gains & Losses

An unrealized loss occurs when a stock decreases after an investor buys it, but he or she has yet to sell it. If a large loss remains unrealized, the investor is often hoping the company’s fortunes will turn around and the stock’s worth will increase past the price at which it was purchased. If the stock rose back above the original price, then the investor would have an unrealized gain for the time he or she still holds onto the stock.

For example, say you buy shares in ABC Company at $10 per share and then shortly afterwards, the stock’s price plummets to $3 per share, but you do not sell. At this point, you have an unrealized loss on this stock of $7 per share. Let’s say the company’s fortunes shift and the share price soars to $18. Since you have still not sold the stock, you’d now have an unrealized gain of $8 per share.

Gains or losses are said to be “realized” when a stock is sold. This is especially important from a tax perspective as, in general, capital gains are taxed only when they are realized. Unrealized gains and losses are also commonly known as “paper” profits or losses, which implies that the gain/loss is only real “on paper.”

Put it to Us?

Q. In reference to the shares of a company, what does the “float” refer to?

– Robert Hall; Calgary, Alberta

A. The term “float” refers to the regular shares that a company has issued to the public that are available for investors to trade. The figure is arrived at by taking a company’s outstanding shares and subtracting from it any restricted stock. Restricted stock is stock that is under some sort of sales restriction; for example, stock that is held by insiders cannot be traded because they are in an escrow lock-up period following an initial public offering.

A company’s float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. Of note, there is an inverse correlation between the size of a company’s float and the volatility of the stock’s price. In other words, in most cases, the lesser the float, the more volatile the share price typically is.

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