This column was originally published on RealMoney on Oct. 14 at 8:55 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Paper doesn't sound like a very important commodity, but just try to live without it. From printouts of spreadsheets to magazines to toilet rolls, flattened-out sheets of tree pulp are heavily woven into our way of life.
You would think that makers of such a key substance in modern life would be as appreciated by users and investors as the producers of energy, electricity and food, but it's just not so. Paper manufacturers are probably the worst-performing group in the entire stock market universe -- many are trading at five-year lows. Do you smell opportunity?
In July, I presented the woeful case of
it was trading in the low $30s. It has since tripped down to the mid-$20s, and dragged down its narrowing list of peers. On Wednesday, the Quebec-based business paper specialist
( DTC) hit a new five-year low, as did the South Carolina-based newsprint specialist
( BOW) and the Oregon-based pulp supplier
Pope & Talbot
The ears of contrarians should perk up when they hear that a whole sector is being hung out to dry, and maybe that is the proper response. After all, who wanted to buy the oil stocks when they were making bone-crushing, multiyear lows in 1999 and 2002? Not many have that kind of courage, but it would have been a great call.
Today the owners of these companies are definitely in the deep, deep value category. Portfolio managers at Brandes Investment Partners and Harris Investment Management, who seem to have the patience of Job and the guts of cat burglars, are listed among the top 10 owners of Domtar, which slipped another 3.5% on Wednesday to $5.93, down from the $12.75 area a year ago.
And what are its prospects? Lousy, of course. Earlier this week, Steve Chercover, an analyst at D.A. Davidson, cut his 2006 estimates for the company with the comment that the procedure "reminds us of a sadistic limbo dance." He said he expects losses to accelerate in coming quarters, and he no longer expects a return to profitability next year.
Part of the problem is the strengthening of the Canadian dollar, says Chercover, but more important is the big advance in natural gas and crude oil prices, as well as the cost of freight and chemicals. And there's the little matter of "stagnating demand" for its uncoated free sheets. At this point, there's little for the company to do but start to shut down some plants and get expenses under control, which will not make the Canadian government very happy.
Bowater may in some ways be the worst of all, as its primarily role in life is to feed the newspaper industry. That's a buggy-whip manufacturer if ever there was one, right? The stock has fallen from $58 five years ago to around $25.
Soleil Securities analyst Anna Torma upgraded the stock to hold from sell this week, which seems like faint praise because she believes the current valuation already fully reflects higher energy costs and weak newsprint pricing. Further problems with energy, she said, will be met with fuel surcharges. The only two bright spots: seasonally positive demand in Europe, where producers are fully booked, and North American newsprint users' hesitancy to force lower prices on suppliers because of the fear that they will close plants.
Bowater's institutional holders also are on the deep value or income side of the room, including MFS Investment Management, NWQ Investment Management, Wellington and Lord Abbett. These guys added about 3.5 million shares to their coffers in the second quarter, the most recent reporting period.
One of the least wretched in this group, and a possible place to start if you've either got a hang-up for paper or chronic contrariness, is the big Finnish manufacturer
( UPM). Sporting a $10 billion market cap, it offers a juicy 10% dividend yield, is still trading in a modestly bullish pattern, and is the biggest beneficiary of a tight European market.
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Jon Markman, writer of TheStreet.com Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
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