Lehman's Ruschmeier Gives Nod to Wood & Paper Stocks; Weyerhaeuser His Top Big-Cap Pick

Some people can't see the forest for the trees lately, fixating on the overall tech misery and missing the fact that there are some stocks and sectors out there having a pretty good year.

Lehman Brothers came out with some guidance this morning for investors who are looking for something new to follow. Peter Ruschmeier, an analyst covering the often-overlooked paper and forest products sector, told investors that he was bullish on wood, despite the fact that these companies have outperformed the market lately.

Pointing out that the Philadelphia Stock Exchange Forest & Paper Products Index, which tracks the sector, has outperformed the S&P 500 by 62% since October, Ruschmeier said the good times could continue. Historically speaking, after overcoming a bear market, as paper stocks at the end September 2000, a bull market in paper stocks lasts 37 months, with outperformance of 37% a year.

"By almost any measure, paper companies have endured their worst bear market since the Great Depression," he wrote. "The most recent bear market in shares lasted from September of 1994 to September of 2000 for a total of 73 months."

Citing a rise in capital efficiency and a bottom in pricing, the analyst said that valuations on many paper stocks were attractive. More specifically, Ruschmeier called Weyerhaeuser (WY Quote) his favorite large-cap pick.

"We give Weyerhaeuser's management the highest rating of the large-cap companies in our universe," he wrote, suggesting that the company's timber interests warrant a higher valuation than other companies, since building products are among the first things to pick up when the economy improves.

Oh, and Ruschmeier was a fan of Weyerhaeuser's attempt to merge with Willamette (WLL Quote), saying that he thought it would go through and would boost earnings and cash flow.

Sappi (SPP Quote), Georgia Pacific (GP Quote), Mead (MEA Quote) and Louisiana-Pacific (LPX Quote) were also touted as strong buys, along with Weyerhaeuser.

Sappi was called a "top pick," as American investors embrace the company and South African investors exit. With that selling pressure weakening, the analyst argued that Sappi would benefit, since it currently trades at 5.6 times earnings.