Value Library

The following is an excerpt from the ABC Perspective - October 2007 - Pg. 16

Research, Patience and Potential Reward

The secret of business is to know something that nobody else knows. Aristotle Onassis (1906-1975) Greek Shipping Magnate

As a fundamental analyst I have always believed in the process of serious hardcore equity research, investment patience, and significant potential rewards. This task has often entailed a deep and tedious analysis so as to uncover an overlooked market gem or diamond in the rough. Often the discovery of a valuable tidbit of company information that the market has disregarded can frequently be serendipitous. In other cases it can be a simple question of investment curiosity and/or good luck. Let me explain.

When we initially started to review Fortress Paper Ltd., one of our two ABC Funds Value Favourites highlighted on page 3 of this ABC Perspective, we weren’t terribly excited. True, the Company appeared interesting in that it was a Canadian-owned international producer of security papers and wallpaper in Switzerland and Germany. However, as net asset value buyers, we could not find a justification for purchasing this small capitalization initial public offering. While we were about to move on to analyze another company, we decided to take a second look at Fortress Paper.

At that time, after poring through the initial public offering prospectus we discovered that the fire insurance value of the properties, inventory, the replacement value of three 12,000 tonne production machinery, its Dresden, Germany’s land, hydroelectric plant and water treatment facility were significantly above the company’s market capitalization and share price. Putting pencil to paper we reckoned that the company was trading at a 75% discount to our estimated net asset or replacement value. We believed that this discount was excessive for assets that were both cash flow positive and profitable. As a result, we decided to purchase just under 10% of Fortress Paper for our ABC Funds.

Now, while the purchase of this lightly-traded, TSE-listed common stock was not without risk, we believed that the serendipitous discovery of its significantly undervalued assets made the risk/reward of this investment quite appealing. But, more importantly, our deep-digging and discovery of Fortress Paper’s undervalued assets, not commonly known by the marketplace, added an exciting upside potential to an unglamourous European production story.

As highlighted in our ABC Perspective front page, “Testing Our Mettle”, we are often willing to be early investors in an excellent longer term investment despite the possibility of negative short-term performance. In summary, by combining serious investigative research and considerable investment patience, we believe that the longer term potential rewards of a Fortress Paper far outweigh its shorter term market fluctuations.

Irwin A. Michael, CFA