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The Cubs Make The Best Paper Tigers
I'm not sure what's more amazing - the fact that the S&P 1500 Paper Products Index is up 68.7% since the end February (which easily tops the S&P 1500's return of 17.1% during that time) or the fact that the S&P 1500 Paper Products Index is still down 58.7% since mid-September 2008, despite the 68.7% rally over the last two months. The broad S&P 1500 Index is down only 31.6% since then - the kind of data value-seekers dream of.
Over the last twelve months I've been forced to use alternative means to find trade-worthy stocks. And I've discovered some great rally-ready values simply by looking for industries that have handed out terrible long-term performances, but boast very positive short-term results.
As you may have guessed, paper stocks are my latest find, but not just any paper stocks. Even amongst the S&P 1500's paper companies, a superior grouping exists.
Acquisitions Brought To A Screeching Halt
A little over a year ago I posted some predictions regarding acquisitions within the paper business. My big expectation was for lots more consolidation via further purchases of the industry's smaller names. (For more, read the April 8, 2008 article entitled Paper Tigers.)
MeadWestvaco (NYSE:MWV) and India-based Bilcare Ltd. jointly bought pharmaceutical packaging company International Labs in July. And Temple-Inland (NYSE:TIN) bought the remainder of Premier Boxboard Limited from Caraustar Industries (Nasdaq:CSAR) just a few days later... a deal that was partially paid for by tapping into a credit line.
The economy and a pathetic credit market, however, caught up with the acquisition trend; those two purchases were the last two significant ones we've seen from theU.S.
Therefore, all those tiny paper companies that were out there then? Yeah, well, they're still out there... and they're looking like juicy targets again. (Companies use M&As and spinoffs to boost profits. Learn how you can do the same in Cashing In On Corporate Restructuring.)
Too Big For Their Own Good?
Although it's not completely true across the board, it's true enough to generalize that the smaller paper companies offer investors two things larger paper companies just can't right now - decent profitability and a potential buyout.
Take industry giant International Paper (NYSE:IP), for instance. If forecasters are right, the company is on track to take a slight loss in 2009 and will barely move into the black in 2010.
Now factor in the fact that net margins totaled a measly 2.7% during 2008 even before the Q4 write-down. Oh, and the company cut its quarterly dividend from 25 cents per share to 2.5 cents per share in March in an effort to save $100 million per quarter. (Income investors probably don't feel as good about the decision.)
It makes you wonder how this stock ever managed to became a large cap.
The industry's other two big names - MeadWestvaco and Weyerhaeuser (NYSE:WY) don't look any prettier in terms of the numbers.
IN PICTURES: Top 7 Social Security Myths: Exposed
Size Matters
You know whose numbers look pretty good though? Maybe good enough for investors to own and for larger companies to acquire? Clearwater Paper (NYSE:CLW), Buckeye Technology (NYSE:BKI) and Rock-Tenn (NYSE:RKT).
To say they're obscure is an understatement. I'd say each is completely dwarfed by the paper industry's bigger names. Yet, each of the smaller outfits has current and/or forecasted results the larger players would kill for... or perhaps pay for.
The following table tells the story.
An investor's best-case scenario in owning these stocks is an acquisition; the worst-case scenario is owning shares of an undervalued and profitable company.
Lesson Learned
Sometimes the best opportunities are buried deep in obscurity. And, sometimes they're uncovered in unconventional ways. Had I not been doing my industry and market cap performance scans, I would have never spotted the renewed strength from small caps in the paper business. (Pulling your money out of the market may help you sleep at night, but is it a smart move? Read Stashing Your Cash: Mattress Or Market? to find out.)
Over the last twelve months I've been forced to use alternative means to find trade-worthy stocks. And I've discovered some great rally-ready values simply by looking for industries that have handed out terrible long-term performances, but boast very positive short-term results.
As you may have guessed, paper stocks are my latest find, but not just any paper stocks. Even amongst the S&P 1500's paper companies, a superior grouping exists.
Acquisitions Brought To A Screeching Halt
A little over a year ago I posted some predictions regarding acquisitions within the paper business. My big expectation was for lots more consolidation via further purchases of the industry's smaller names. (For more, read the April 8, 2008 article entitled Paper Tigers.)
MeadWestvaco (NYSE:MWV) and India-based Bilcare Ltd. jointly bought pharmaceutical packaging company International Labs in July. And Temple-Inland (NYSE:TIN) bought the remainder of Premier Boxboard Limited from Caraustar Industries (Nasdaq:CSAR) just a few days later... a deal that was partially paid for by tapping into a credit line.
The economy and a pathetic credit market, however, caught up with the acquisition trend; those two purchases were the last two significant ones we've seen from the
Therefore, all those tiny paper companies that were out there then? Yeah, well, they're still out there... and they're looking like juicy targets again. (Companies use M&As and spinoffs to boost profits. Learn how you can do the same in Cashing In On Corporate Restructuring.)
Too Big For Their Own Good?
Although it's not completely true across the board, it's true enough to generalize that the smaller paper companies offer investors two things larger paper companies just can't right now - decent profitability and a potential buyout.
Take industry giant International Paper (NYSE:IP), for instance. If forecasters are right, the company is on track to take a slight loss in 2009 and will barely move into the black in 2010.
It makes you wonder how this stock ever managed to became a large cap.
The industry's other two big names - MeadWestvaco and Weyerhaeuser (NYSE:WY) don't look any prettier in terms of the numbers.
IN PICTURES: Top 7 Social Security Myths: Exposed
Size Matters
You know whose numbers look pretty good though? Maybe good enough for investors to own and for larger companies to acquire? Clearwater Paper (NYSE:CLW), Buckeye Technology (NYSE:BKI) and Rock-Tenn (NYSE:RKT).
To say they're obscure is an understatement. I'd say each is completely dwarfed by the paper industry's bigger names. Yet, each of the smaller outfits has current and/or forecasted results the larger players would kill for... or perhaps pay for.
The following table tells the story.
|
Company |
Trailing 12 |
Trailing 12 Mo. P/E (ex. items) |
Forward- Looking P/E (cal. 2009) |
Calender 2009 est. EPS |
|
|
0.78% |
13 |
14 |
$ 0.85 |
|
Buckeye |
-11.71% |
-- |
7.6 |
$ 0.51 |
|
|
3.22% |
15 |
9.6 |
$ 3.45 |
An investor's best-case scenario in owning these stocks is an acquisition; the worst-case scenario is owning shares of an undervalued and profitable company.
Lesson Learned
Sometimes the best opportunities are buried deep in obscurity. And, sometimes they're uncovered in unconventional ways. Had I not been doing my industry and market cap performance scans, I would have never spotted the renewed strength from small caps in the paper business. (Pulling your money out of the market may help you sleep at night, but is it a smart move? Read Stashing Your Cash: Mattress Or Market? to find out.)
by
James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
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