With most investors focusing their attentions on high-flyers such as LinkedIn (NYSE:LNKD), many "boring" sectors of the market are going unnoticed. Nothing could be more uninteresting than paper companies. After all, toilet paper, cardboard boxes and fax paper aren't something we really think about on a daily basis. However, rising pulp prices, growing global economic activity and a string of mergers/acquisitions could see the sector rising from obscurity. For investors, the time may be right to add the paper tigers to a portfolio.
TUTORIAL: Top Stock-Picking Strategies

A New Growth Sector
As the digital office has begun to take hold, many investors have abandoned paper companies. This effect was intensified by the recession-driven market sell-off during 2008 and 2009. However, despite the rise of the paperless office, business paper consumption has steadily grown. The average North American office worker uses roughly 10,000 sheets of paper a year. This amount actually rose significantly with the adoption of PCs and e-mail, as more workers print the electronic communication. Total shipments of printing/writing paper in March were 11.7% higher than in February and saw 12.9% growth over March 2010.

Corrugated Box Shipments also Rising
It's not just office paper that is seeing an increase. Improved economic activity has helped corrugated box shipments rise 2% in the U.S. during the first quarter. This follows a 3.5% increase for all of 2010. What's more exciting is this increase is the first sequential increase following such a strong yearly advance since the mid-90s. According to the American Forest & Paper Association, containerboard, boxboard, unbleached kraft and solid bleached folding paperboard all saw production gains for February 2011 versus the same period a year ago. Pulp prices have been strong due to the Chilean earthquake and a Finnish port workers strike. Analysts expect that tight supplies will result in at least a price hike of about $50 a ton on containerboard in the U.S. by this summer.

After the credit crisis hit, many over-leveraged pulp and paper companies fell by the wayside. AbitibiBowater's (NYSE:ABH) recent emergence from bankruptcy protection comes to mind. Stronger and better capitalized firms have been taking advantage of fire sale prices and bankruptcy assets. This is similar to what is happening in the tech and real estate sectors. Mergers will continue to play out within the paper sector. Recently, International Paper (NYSE:IP) made a $3.8 billion bid for Temple-Inland (NYSE:TIN). This follows Rock-Tenn's (NYSE:RKT) recent purchase of Smurfit-Stone.

Adding Those Paper Gains
With some analysts predicting that the paper and container board sector is only halfway through a current upward cycle, investors may want to consider the sector for a portfolio. Funds like Guggenheim Timber (NYSE:CUT) make adding the entire forestry sector to a portfolio easy. However, plenty of individual picks should see gains as well.

Spun off from timber REIT Potlatch (Nasdaq:PCH), Clearwater Paper (NYSE:CLW) produces private label tissue products such as toilet paper, paper towels, napkins and facial tissues to grocery stores. With more consumers switching to private label brands, Clearwater is in a unique position to profit from the trend. Shares of the paper company trade for a P/E of less than 10 and a PEG ratio of just 0.76.

Paper Stock Surging in Brazil Too
Paper growth isn't limited to North America. Brazilian stock Fibria Cellulose SA (NYSE:FBR) saw its net income surge to $241 million in the first quarter. This is a huge increase versus $5.6 million in the year-ago quarter. The stock yields 2.5%, and analysts see at least 14% more upside in the share price. Similarly, South African company Sappi Limited (NYSE:SPP) allows investors to tap into other emerging markets.

Finally, for those investors who may want to bet on the continuation of mega-mergers throughout the sector, KapStone (NYSE:KS), Packaging Corp. of America (NYSE:PKG) and Graphic Packaging (NYSE:GPK) have all been identified as potential buyout targets due to their market caps.

Bottom Line
Left for dead by many investors, the paper and packaging sector offers some interesting growth prospects. Rising pulp prices, expanding global economies and a new wave of merger fever are adding excitement to the boring industry. For investors, the time could be right to add the sector to a portfolio. (For additional reading, also see More Mergers In Container Sector.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center