Hi Lou,
Great to have you back on twitter. Can you give me your take on Sino-Forest Corp. On the one hand, there were allegations of fraud, which dropped the value of the stock by 60 % since June. On the other hand, Singapore’s Mandolin Fund and Boston based Wellington Management Co. have bought into it big times and the stock value has risen substantially. What do you think will the future hold for TRE.TO.

As always, thanks for your analysis.

Bob

Hi Bob,

Thanks for the assignment. Sino Forest Corp. (TRE TSX) has had a rough time since early June when Muddy Waters LLC claimed that the company was involved in a number of fraudulent activities. That had investors selling with both hands tanking the stock to lows near $2.00 by mid June. There was a bounce as new institutional investors came in to buy up orphaned positions but as to your question is the current advance sustainable?

Given the current psychology in the market where even great companies with no question as to the validity of their claims are getting sold off  it would be wise to be prundent. Lets consult the charts for some guidance.

The three year chart illustrates the drop and the pop that started with the Muddy Waters comments. If you look closely at the RSI and MACD in April of 2011 they were both signalling that the momentum in the stock was shifting from buying to selling. As we got into mid June the RSI and MACD both indicated a shift back to buying as investors found some value in the rubble. The buying took the shares back to $8.00 where they met resistance and began to pull back.

The six month chart depicts what appears to be a cup and handle pattern forming. A cup and handle is typically a continuation pattern that would have suggested a move above resistance along the 50 day moving average.

However given market sentiment arising from the downgrade of debt issued by the United States at Standard and Poor’s it would be advisable to let the general selling frenzy abate before chasing any stock. Let alone one which has had its credibility put under the microscope.

It is in these times that we need to remember that all recessions and even depressions end. The only question will be who and where you will be when it is over.

Make it a profitable day and happy capitalism!

Hi Lou,
It looks like the high flying Fortress Paper might be poised for the dreaded death cross on a 1 year chart basis (50 day & 200 day moving averages) as the stock has recently broken down below the $40 support.
What do your indicators say?
Thanks,
Ross

Hi Ross,

Fortress Paper Ltd.(FTP TSX) was the beneficiary of a huge advance over the last year. But as you have observed there has been a trend reversal. I have posted an analysis on the company twice. The first time on September 1. 201o and the last time on January 10. 2011.

 In the January report it looked like FTP was poised to continue to advance with an advisory to watch for the flex point associated with the release of Q4 results. The original release was scheduled for February 14, 2011 but got pushed back into March. When we examine the charts they will illustrate an interesting lesson.

The three year chart depicts a huge advance that started at $5.00 in March of 2009 and peaked at $62.50  in February of 2011. As my buddy Steve Kalil’s  aunt used to say ” Nothing Wrong With That!!!” But what is wrong,  is that the uptrend line has been breached and now the question is where does the stock find support?

The six month chart offers a prime example of  both the RSI and MACD signalling a shift in momentum as the shares peaked at $62.50 on February 21, 2011. Some of the selling must have been motivated by the fact that the Q4 results were pushed back.

 Usually when a company has beaten the forecast for a quarter they can’t wait to brag on it and either hit the expected release date or announce early. In the case of a delay in releasing quarterly results it is often viewed as a less than robust piece of news. Some investors see it as needing the additional time to work with the results to put as much lipstick on the pig as possible.

When the Q4 numbers were reported on March 14, 2011 the company missed the forecast and that accelerated the selling that started weeks earlier. We can also see that the stock has now crossed below both the 50 and 200 day moving average and there is a death cross forming.  Volume has also thinned out. Over the last three months average daily volume has been 74,641 shares. Twenty two of the last thirty trading days have seen less than average volume.  A stock cannot go up without volume.

Currently none of the indicators are suggesting a reversal of the downtrend that started in late February. The shares do look to be trying to catch support at $35.00 but the lack of volume puts a caution flag on the track for me. Approach this one with caution given that over the course of the advance FTP didn’t build support below these levels until $30 and then at $25.00.

Happy Capitalism!

Hi Lou,

Can you please share your views on Catalyst Paper Corp. I recently bought in at $0.39 and have watched it slide down to $0.25. Should I buy more or cut my losses and sell?

Regards,
Tony

Hi Tony,

Catalyst Paper Corp ( CTL TSX) will report its Q1 2011 results on April 27, 2011.  CTL produces newsprint, other paper products, and pulp. They have four operating mills and generate over $1 billion in sales but they have not been enjoying much prosperity. When I review a company’s corporate presentation and at the top of their priority list is to focus on cash flow and liquidity followed by reducing fixed and labour costs it frames the story as a scramble.

Yes, at times I have seen  management teams pull an elephant through a keyhole, but I’m not sure that this is one of them. Lets consult the charts to get a better handle on this stock.

The three year chart indicates that the stock enjoyed a good ride from the September 2010 lows at $0.10 to the February 2011 high at $0.50. The RSI and MCD both signalled a change in momentum from buying to selling. In addition a double top formed as the stock met resistance at $0.50.

The six month chart illustrates the RSI moving out of overbought territory in early February and the MACD turning down. The double top emerged in late February and early March and set up the decline to support along the 200 day moving average at $0.24.

I have no idea what attracted you to this stock in the first place. On an operating basis its focus is on cutting costs and shutting down operations. Technically it is in a downtrend and that’s not a good time to get on a ride.

You asked if you should average down and as a general rule I don’t recommend it. Why add to a losing position? I think you would be better off to find another stock thats going up and hitch your cash to that rising star.

Happy Capitalism

Hi Lou,

At the end of the year there is always talk about the best performers on the TSX for the year. I am asking about Tembec. It looks like they are on the TSX and they are up almost 4 times in the past year. I can’t find them anywhere in the top 10 lists. As far as I can see they should be up there in the top. Am I missing something? I can’t be missing too much though, I started buying TMB around $1.40.

Thanks,

Kev

Hi Kev,

The pulp, paper, and wood products industry has been suffering from over capacity and lack of pricing power for such a long time it should come as no surprise that many analyst and investment managers are somewhat gun shy if they even still continue to follow the sector. However, you my friend noticed what many did not and because of that were well rewarded. Congratulations!

The upswing in demand for wood products can be attributed to  China where they have increased their use of lumber as a building material. Now if only the U.S. can claw its way out of  its housing slump prices would move higher and support further advances in the sector. Another contributor to the upside in the industry has been the high cost of cotton pushing demand for dissolving pulp used in the manufacture of rayon as a substitute.

Th charts will help determine if Tembec will continue to reward you for your investment.

The three year chart depicts the aggressive move off the August 2009 lows when TMB was trading for substantially below $1.00. The bounce off of the 200 day moving average in September of 2010 when it traded at $1.60 took it all the way to $5.00 where it has met resistance.

TMB has had a great move but at this point the hockey stick pattern has me a bit concerned given that the stock has pulled noticeably away from its moving averages. Usually these sorts of trajectories are just not sustainable.

The six month chart illustrates the resistance at $5.00 and the pullback over the last four trading days.The MACD and RSI are both signalling a change in momentum from buyers to sellers. The next major level of support is at $3.75.

At this point it would appear that TMB is going to take a breather and the question you have to ask is how much of your hard earned profit are you willing to give up as the stock tests support.

Happy Capitalism!

A company is trading in Canada, Toronto I guess, and I can find nothing. They provide material for manufacturers of “RAYON” cloth. What can you tell me?

Thanks,

Andy

Thanks Andy,

I think the company that you are asking about is Fortress Paper Ltd. (FTP TSX). I last posted a response regarding the company on September 01, 2010. Mario wanted to know if it would reach $40.00 from the $30.00 price point it was trading at on that day. The stock was overbought at that point and it looked like it was going to pull back. But it didn’t. The buying kept piling in for the next 60 days taking the stock to its recent high of $48.99.

Clearly FTP has enjoyed a great advance. Lets consult the charts to see what they are indicating as we proceed further into 2011.

The three year chart depicts the sweet advance FTP has enjoyed from the April 2009 lows. In the summer of 2010 it took a breather meeting resistance at $25. The move through $25.00 has run  all the way to $48.99 and now appears to be meeting resistance at $48.00 The uptrend line is in place, and there is support along the 50 day moving average which are both good signals that the advance can continue.

The six month chart illustrates the support on the 50 day moving average and the resistance at $48.00. The MACD and RSI are both indicating a move higher. The last three candlesticks also suggest that investors are confident and are buying when FTP pulls back.

The next flex point for FTP is February 15, 2011 when it is scheduled to report Q4 results. Analyst expect the company to earn $0.14 a share which is a drop from Q4 2009 but that looks like its already baked into the current price. 

Happy Capitalism!

Hi Lou,

I’ve taken a small position in FTP recently and the return has been exceptional to say the least. Is this stock ahead of itself relative to share price or is the target price of $40 on the horizon ? Thanks Lou !

Mario

Hi Mario,

The Fortress Paper Ltd. (FTP TSX) story is driven by the efforts of founder Chad Wasilenkoff , age 38. Wasilenkoff has led the stock price higher by looking for undervalued assets and developing  new potential. The  jump in the price of FTP in March of 2010 was triggered by the purchase of a bankrupt paper mill in Thurso, Quebec for $1.2M and then getting a low interest loan from the provincial government  for $102M.

 The capital will fund the retrofit of the  the facility so it can produce dissolving pulp used in the production of rayon. The stock was taken public in 2007 with the issue of five million shares priced at $8.00.  The charts will give us some idea if this small cap has more in store.

The three year chart illustrates the huge wealth created by FTP after it recovered from the March 2009 lows. When you look at the RSI it indicates that at today’s levels the stock is overbought which comes as no surprise given the amount of interest the Thurso project has generated. But keep in mind that the actual production of dissolving pulp is still a year away.

It would seem that all the good news has been baked into this story. That doesn’t mean that it will collapse and shred value but keep in mind that trees don’t grow to the sky.

The six month chart provides a number of metrics to watch. The RSI as mentioned is signaling an overbought situation while the MACD looks to be making a move to the downside. Back in July they both generated buy signals that saw FTP move from a low of $20 to its $30 close on August 31. Sweet! If the stock starts to pullback look of support at $26.00 then $23.00 and below that at $20.

To your question of FTP making it to the target price of $40. Yes its possible but it might have to go through $26.0 to get there!

Happy Capitalism!

Hi Lou,

Your take on Cathay Forest (CFZ) please. Their trees are growing fast, China is booming but CFZ is not moving!!! It may be another Sino Forest (TRE)!!!

Kind regards,
Bish

Hi Bish,

Thanks for the assignment but lets keep in mind that Cathay Forest Products Corp. ( CFZ TSXV) has a  long road to travel before it can be viewed in the same light as Sino Forest Corporation ( TRE TSX) which has been developing its business since 1994 giving it a full decade lead on CFZ.

Cathay Forest Products is focused on helping China overcome a shortage of wood needed to grow its economy. The company began planting fast growth poplar plantations in 2004. The poplar species selected for the plantations were identified as having the best potential in the local environment and are forecast  to reach suitable  size  for harvest in a five year cycle.

Poplar fiber is used in making pulp, paper, wood pallets, and particle board. CFZ has 13,000 hectares of poplar growing  in various Chinese provinces with the vast majority in Shandong. CFZ also manages standing timber assets fromm which it generates cash flow from selected harvesting intended to grow wider trees over time.

Click to Zoom

The three year chart shows a nice recovery from the lows with a double bottom pattern signaling the move higher.

Currently the stock is experiencing resistance at the $0.70 level.

Click to Zoom

The three month chart gives a good view of the resistance at $0.7o. The MACD turned down in September suggesting that upside momentum had dissipated.

The stock is also testing support on its 50 day moving average which puts a caution flag on the track. If it breaks below $0.625 it would be a signal to look for an exit as there is very little support until $0.475

Cathay has been growing its revenue but has yet to get over the hill to profit.

Cathay generated $14M in revenue  its Q2 while Sino Forest generated over $220M in their Q2.

I think that tells you what a 10 year head start will create in a business where you are depending on nature to grow your wealth.

I would say that at these prices and and given a very long term investment horizon you have a good opportunity with CFZ. Establish a core position and then trade on strength and weakness to get your adjusted cost basis to zero as quickly as possible.

Happy Capitalism!

Hey Lou,

Always looking for professional opinions.  I’ve been told that Ainsworth Lumber could be  in for a great recovery. They have sold a lot of their dead weight. Big player years ago. Is the paper world coming back? I know it will be in demand, very soon. Your opinion?

Paul

Hi Paul,

Ainsworth Lumber Co. Ltd. ( ANS TSX) is just concluding a restructuring that has seen the bondholders take control of the company. The deal has the bondholders controlling 96% of the company and shareholders holding 4% of the new shares.

The tale of woe at ANS is the story of an aggressive expansion that needed strong and sustained commodity prices to make the strategy work. The collapse of the U.S. housing market took the air out of the plan and left the company with $1B in debt.

The three year chart shows a stock that was in a steady and sustained decline till April of 2009. ANS has broken the downtrend but is still struggling.

The three month chart shows an advance off of support at $1.00 but the volume is inconsistent and makes me wonder if the advance is real.

An investment in Ainsworth Lumber is a call on a recovery in the housing industry which drives demand for the milled and engineered products that they make.

There have been some signs of life in the U.S. housing market with June new home sales up 11% but keep in mind that its an 11% rise from a low base.

The restructuring of the company has it better positioned to move through the current economic environment but until we see some growth in employment the demand for new homes will be muted.

Watch for resistance at $1.40 and be aware of the thin volume that has been the norm during the August advance.

Happy Capitalism.