Market Buzz – Building a Fortress

Posted by Ryan Irvine

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Market Buzz Building a Fortress

In a week in which we learned that the U.S. Reserve had decided to raise the rate it charges banks for emergency loans, known as the discount rate.

The Fed said the step should not be seen as a signal that it will soon boost interest rates for consumers and businesses, but investors’ initial reactions were one of worry that the days of ultra-low interest rates are coming to an end sooner than thought.

However, on Friday, stocks turned higher in late morning trading as investors (after further reflection) saw the Fed’s move as a vote of confidence that the financial system was recovering and that banks no longer need as much support.

In the U.S., the latter remains to be seen.

From our Canadian Small-Cap Universe (, this past week brought an unexpectedly strong fourth quarter from Fortress Paper Ltd. (FTP:TSX).

Fortress Paper is an international producer of security and other specialty papers. The company owns and operates two paper mills, the Landqart mill located in Switzerland and the Dresden mill located in Germany. Fortress’ security papers include banknote, passport, and visa papers.

This past week, the company announced that its revenues for the three months ended December 31, 2009, rose 10.16 per cent to $51.04 million from $46.33 million in the same period of the prior year. Fortress reported net income of $3.7 million for the fourth quarter of 2009, or diluted earnings per share of $0.35. For the fourth quarter of 2008, the company reported net income of $2.8 million, or basic and diluted earnings per share of $0.27.

Perhaps more importantly however, adjusted net income (excluding a loss on foreign exchange translation) for the fourth quarter of 2009 was $0.47 per share, well ahead of the consensus estimate of $0.29.

As the year progressed, the company’s mills have weathered the economic crisis and continually produced improving results, culminating for a record Q4.

We are happy to report that the stock is now up over 20 per cent in the past month and over 50 per cent in the past four months to new all time highs.

Looniversity Avoid Fear and Greed

Volatility is inherent in the stock market. When investors lose their comfort level due to losses or market instability, they become vulnerable to the emotions of fear and/or greed, often resulting in very costly mistakes.

Try your best to avoid getting swept up in the dominant market sentiment of the day, which can be driven by either of these emotions, and stick to the basic fundamentals of investing. It is also important to choose a suitable asset-allocation mix. For example, if you are an extremely risk-averse person, you are likely to be more susceptible to being overrun by the fear dominating the market and therefore your exposure to equity securities should not be as great as those who can tolerate more risk.

One of the world’s most successful investors, Warren Buffett was once quoted as saying, “Unless you can watch your stock holding decline by 50 per cent without becoming panic-stricken, you should not be in the stock market.”

Mr. Buffett also showed us just how important and beneficial it is to stick to a plan in times like the dotcom boom. Buffett was once heavily criticized for refusing to invest in high-flying tech stocks. He stuck with what he was comfortable with: his long-term plan. By avoiding the dominant market emotion of the time – greed – he was able to avoid the losses felt by those hit by the bust.

Put it to Us?

Q. Can you give me an overview of a company’s balance sheet?

– Arthur Leung; Calgary, Alberta

A. A firm’s balance sheet is a snapshot of its financial picture on a given day. One side of the balance sheet totes up assets, moving from most liquid (cash) to least liquid (plant and equipment or goodwill). The other side of the balance sheet lists liabilities in order of immediacy.

Assets and liabilities are listed in order of liquidity (relative ease of convertibility to cash), from most liquid to least liquid, and are sectioned such that assets are on the left hand side and liabilities on the right hand side. For simplicity’s sake, think of a B/S as an indicator of net worth; that is, how much a company is worth “on the books.”

The balance sheet gives investors a general overlook of a company’s financial situation. That is, it tells investors exactly what a company owns (assets) and who they owe (liabilities). Essentially, the balance sheet is a report card of a company’s financial health at one point in time.

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