Cut Positions in Paper Stocks

NEW YORK ( TheStreet) -- In the game "rock, scissors, paper," scissors cut paper, and that's what investors should do with the sell-rated names in the paper and paper products industry.

The only undervalued sector among 16 sectors covered by ValuEngine is basic materials, undervalued by 7%. Unfortunately for investors, it is difficult to find value stocks within the sector. Out of 416 companies only 14 have buy ratings. There are 155 stocks rated sell and another 60 rated strong sell. With 51.7% of all stocks rated sell, I give the basic materials sector an underweight rating.

When you drill down to the industries within the basic materials sector the valuations are quite divergent. The cheapest industry is gold mining, undervalued by 34%. The most overvalued industry is paper and paper products overvalued by 31%. There are 32 stocks in this industry and 23 have sell or strong sell ratings. With 71.9% of these stocks rated sell I give the industry an "avoid-source of funds" rating.

Today I provide my buy-and-trade parameter for nine paper and paper products stocks with the strategy to sell strength on these names, particularly for the five stocks rated sell. All but one of these stocks are overvalued and eight have gained between 18.4% and 73.2% over the last 12 months, which justifies profit-taking particularly with seven of these stocks projected to decline by 3.5% to 9.7% over the next 12 months.

Eight of the nine stocks are above their 200-day simple moving averages (SMA), which reflects the risk of a reversion to the mean. Note also that five of the nine stocks missed earnings estimates.

Reading the Table

OV / UN Valued -- The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage, according to ValuEngine.

VE Rating -- A "1-Engine" rating is a Strong Sell, a "2-Engine" rating is a Sell, a "3-Engine" rating is a Hold, a "4-Engine" rating is a Buy and a "5-Engine" rating is a Strong Buy.

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