Packaging Stock Breakdown Offers Short Sale Opportunity

Weaker shipping box demand and slower exports may affect revenue

A global economic slowdown from the ongoing trade war between the United States and China may finally be finding its way into the packaging and containers subsector. Until now, stocks in the subsector have remained relatively unscathed from the year-long trade spat between the world's two largest economies, posting impressive operating results that have benefited from surging e-commerce sales.

However, several recent broker downgrades pointing to weaker shipping box demand and slower exports indicate that key industry players may finally be succumbing to the imposition of tariffs slowing international trade. Despite very little company- or industry-specific news Monday, a wave of selling hit three large-cap stocks in the space, driving their share prices down more than 4% below technical support.

Traders who want to play the chart breakdowns should explore these short sale trading ideas.

International Paper Company (IP)

With a market value of $17.17 billion, International Paper Company (IP) manufactures paper and packaging products, such as corrugated boxes and printing papers. The Memphis, Tennessee-based company generates 75% of its revenue in the United States but also has operations in Brazil, Russia, India and China. Analysts expect the paper giant to post second-quarter earnings per share of $1.05, down from $1.19 in the same quarter last year, which would indicate a year-over-year (YoY) growth rate of -11.8%. Bank of America downgraded International Paper stock from "buy" to "neutral" in April due to weak containerboard industry data that showed YoY box shipments down 3% in March. Although the company's shares are up 12.91% year to date (YTD), they are underperforming the packaging and containers industry average by nearly 7% over the same period as of May 21, 2019. Investors receive a 4.27% dividend yield.

International Paper shares added the majority of their gains in January and have spent February through May trading sideways to slightly lower. Price broke down from the four-month range-bound period in Monday's trading session, which provides a short sale opportunity for momentum swing traders. Those who take the trade could set a stop-loss order above yesterday's high at $44.07 or allow for more wiggle room with a stop positioned above the May 16 high at $45.90. Look to cover the position at either the October or December swing low.

Chart depicting the share price of International Paper Company (IP)

WestRock Company (WRK)

WestRock Company (WRK) manufactures and sells paper and packaging solutions for the consumer and corrugated markets in North America, South America, Europe and Asia. Although the $9.04 billion packing company surpassed Wall Street's second-quarter earnings estimates, the reported figure declined 3.6% on a YoY basis. Also, the company's revenue of $4,620 million over the period fell short of analysts' expectations of $4,652 million. German investment bank Deutsche Bank downgraded the company from "buy" to "hold," citing deteriorating export markets for the downward revision. As of May 21, 2019, WestRock stock issues a 4.74% dividend yield and has returned -4.50% YTD, underperforming the industry average by a whopping 21.74%.

The stock has traded within a tight five-point range since February that allows short sellers to take a position in preparation for the next move down. While the stock trades above its April low, it broke down to close beneath an area of recent consolidation Monday that indicates further downside price action in the days and weeks ahead. Traders who enter here should set an initial stop above yesterday's high or above the 50-day simple moving average (SMA), depending on risk tolerance. Consider using a fast period moving average, such as the 15-day SMA, as a trailing stop to let profits run.

Chart depicting the share price of WestRock Company (WRK) 

Packaging Corporation of America (PKG)

Founded way back in 1867, Packaging Corporation of America (PKG) manufactures and sells containerboard and corrugated packaging products primarily in the United States, controlling about 10% of the domestic containerboard market share. The company differentiates itself from its larger competitors by targeting smaller customers. Analysts expect Packaging Corporation of America to post full-year 2019 earnings growth of 7.3%, significantly down from 2018's 33.4% growth rate. When Bank of America downgraded International Paper last month, it also downgraded Packaging Corporation of America for the same reason – weaker March containerboard box shipments. Trading at $92.39 with a market cap of $8.66 billion and offering a 3.19% dividend yield, the stock has gained 11.65% on the year as of May 21, 2019.

Packaging Corporation of America's chart flashed a buy signal in late April when the 50-day SMA crossed above the 200-day SMA – referred to as a "golden cross." However, the recent break below a three-month trading range confirms a false signal. Monday's 4.6% fall was accompanied by the heaviest volume this month, which increases the probability of some additional downside follow-through. Those who take the short trade should set a profit target between $82.50 and $77.50. Control risk by placing a stop above yesterday's high price at $94.80. Alternatively, more conservative traders could set a stop above the 200-day SMA.

Chart depicting the share price of Packaging Corporation of America (PKG)
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