jump into paper stocks, there's one thing you should consider. The collateral damage from a potential
bankruptcy could negatively affect the prices of other commodities such as pulp and paper. I like the stocks now, but there may be an even better buying opportunity in the near future.
Enron is involved in contract swaps and hedges, and the physical delivery of forest products commodities such as pulp and newsprint. The company is also involved in the production of newsprint, with one mill in the U.S. and two in Canada. According to Richard Kelertas, UBS Warburg's forest products and paper analyst based in Montreal, there's talk that Enron has been selling some tons of newsprint at "bargain-basement prices." This is newsprint that the company doesn't have under covered contracts, and which it is willing to sell at cost to raise cash. This will likely continue to cause pressure on newsprint prices, which are already very weak.
Such price pressure would be particularly bad news for big newsprint companies such as
( BOW), companies that are highly sensitive to changes in newsprint prices. Kelertas also says that he's heard that Enron could possibly liquidate its pulp inventories to raise cash over the next few months.
Though the company won't say, it's rumored that Enron has 300,000 metric tons of supply in warehouses that it used as a hedge on its contracts. These contracts will probably not be honored if Enron declares bankruptcy, and then the pulp could be liquidated on a fire-sale basis to raise funds. (Kelertas rates Abitibi hold, and his U.S. counterpart Richard Schneider rates Bowater strong buy. UBS Warburg has been an adviser to Abitibi on banking deals.)
Of course, it is up to the bankruptcy court judge to determine how the disposition of assets takes place. An orderly liquidation may not have much of an impact on prices. Kelertas says 300,000 metric tons is equivalent to about 20% to 25% of current Norscan (North American/Scandinavian) producer inventories, or about 20% of one month's production. "It's enough to give you headaches, and it could have a detrimental impact for months to come," he notes. The worst-case scenario -- a fire sale of pulp inventories -- could send pulp prices back to their September lows, Kelertas says.
If that were to happen, the pulp and paper stocks, such as
, could give back some of their recent gains. If this worst-case scenario were to unfold, the downturn in the share prices may not be more than 5% to 10%, but I feel that even that small dip would present a terrific buying opportunity.
Odette Galli writes daily for TheStreet.com. In keeping with TSC's editorial policy, she doesn't own or short individual stocks, although she owns stock in TheStreet.com. She also doesn't invest in hedge funds or other private investment partnerships. She invites you to send your feedback to