In this article we discuss 10 best paper stocks and the state of the paper industry in detail. You can skip this discussion and click to read 5 Best Paper Stocks to Buy Now.
The paper industry is highly dynamic, with its applications evolving rapidly. The industry is extremely resilient and has several long-term growth catalysts. With the dawn of the digital age, average investors believed that the paper industry will suffer as people move to e-books and websites. But the technology revolution actually proved to be a positive development for paper stocks. Firstly, the demand for physical books still beat e-books by huge margins. Data from 2019 showed that physical book publishers in the U.S. made a whopping $22.6 billion in revenue in just 2018, while revenue from e-books came in at just $2.04 billion. A report from the New York Times said that the pandemic fueled the demand of paper-based books, squeezing the capacity of major book printers. As of August, unit sales of physical books jumped 5% compared to the same period last year. From early June to mid-August, print sales jumped by more than 12% over a period of 10 weeks, the Times report said, citing NPD BookScan. This has been a major driver of growth for paper stocks in the U.S.
Ecommerce: A Key Catalyst for Paper Stocks
One of the strongest growth catalysts for paper stocks is the e-commerce boom in the U.S. and abroad. As retailers and small businesses scramble to adapt online channels to sell their products, they need paper and pulp packaging to fulfill their orders. Companies prefer to use corrugated sheets and boards to package their products before delivery. Corrugated boards and packaging are made of paper sheets. Data shows that the ecommerce industry uses about 7 times more corrugated per dollar of sales than traditional retail logistics. Corrugated box shipments rose 1.9% per year from 2015 to 2018, the best run of sustained growth for the sector since the 1990s.
Packaging
According to a Mordor Intelligence report, the e-commerce packaging market was valued at $27.04 billion in 2020. Analysts expect the market to grow at a CAGR of 14.6% to reach $61.55 billion from 2021 to 2026. An important factor that will drive paper stocks in the future is the global push towards sustainable and paper-based packaging to cut plastic waste and carbon emissions. McKinsey said in a report that major paper producers are working on flexible paper-based packaging with water-based coatings that act as barriers against vapor, oxygen, and oil. Another example is a major paper company working to include Micro-Fibrillated Cellulose (MFC) in its paper board to develop stronger but lighter packaging.
McKinsey believes that over the next 10 years, the paper industry is set to see a strong growth in consumer and industrial packaging, tissue and fiber-based products. This will offset some declines in traditional paper-based products, like graph-paper. The firm also said that there is a room for cost reduction and modernization in the industry, and paper companies can reduce production costs by 15% by implementing digital manufacturing techniques, including forestry monitoring via drones, automation, big data and AI.
All conventional industries are going through a period of drastic changes, causing financial markets to feel the reverberations. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
You have to keep in mind that our rankings represent hedge funds’ list of the best paper stocks to buy. Our premium newsletters might have a different opinion (or no opinions at all) on these stocks. With the state of the paper industry in mind, let’s see the 10 best paper stocks to buy now.
Washington-based Clearwater Paper Corporation was created as a result of a spin-off from the real estate investment trust (REIT) company Potlatch Corporation. The company makes bleached paperboard, consumer tissue and wood products. On Jan. 21, BMO Capital Markets started covering Clearwater Paper stock, with an Outperform rating based on an attractive view of valuation. The firm has a price target of $48 for Clearwater shares.
Clearwater Paper ranks 10th on the list of 10 best paper stocks to buy now, as 13 hedge funds in Insider Monkey’s database own positions in the company, as of the end of the third quarter.
VRS ranks 9th in our list of the best paper stocks to buy now. Verso makes coated paper, coated groundwood, coated freesheet, supercalendered and specialty products. The company has two paper mills in the U.S. It was formed in 2006 after private equity firm Apollo Global Management bought the coated and supercalendered paper business from International Paper. Verso in 2015 bought NewPage Holdings.
A total of 15 hedge funds in Insider Monkey’s database held positions in Verso at the end of the third quarter, unchanged from the previous quarter. Among these funds is John R. Wagner’s SCW Capital Management, which owns 2.2 million shares of the company.
AMCR ranks 8th in our list of the best paper stocks to buy now. Founded in 1860, Amcor sells paper-based packaging, containers and cartons. The company announced the construction of 400,000-tonnes per annum recycled paper mill in 2008, which started operations in 2013. The facility is enough to meet the company’s paper needs for Australia and Asia. In November 2020, Amcor shares rallied after the company beat Q1 EPS estimates and also increased its FY2021 guidance. The company expects EPS to grow in the range of 7% to 12%.
Amcor stands 8th on the list of 10 best paper stocks to buy now, as 18 hedge funds in Insider Monkey’s database held positions in the company at the end of the third quarter.
Illinois-based Packaging Corporation ranks 7th on the list of 10 best paper stocks to buy now. The company owns 6 containerboard mills, 2 white paper mills, 95 converting facilities, 10 creative design centers and several fulfillment centers. In 2017, Packaging Corporation bought Sacramento Container Corporation, which makes corrugated. The company also acquired Englander Container and Display in 2018.
As of the end of the third quarter, 23 hedge funds tracked by Insider Monkey held long positions in Packaging Corporation, compared to 25 funds a quarter earlier. The total value of these stakes is $158.1 million.
As of the end of the third quarter, Cliff Asness’ AQR Capital Management owns 600,767 shares of the company, worth $65.5 million. We recently shared a bullish investment case in PKG shares in this article:
The third-largest manufacturer of containerboard and corrugated packaging products for use in protecting goods during shipment, PKG, went public in 2000. The Illinois-headquartered company also produces multi-color boxes and displays, as well as meat and wax-coated boxes for the agricultural industry. With over 15,000 employees and market cap of over $10 billion, PKG is widely covered by market analysts. The senior management’s remuneration is tied to the company’s earnings target, and other related parameters.
With 70% of packaging customers confined to the local and regional sectors, PKG is able to book highest industry margins.
In the paper segment Office Depot contributes to almost half of the segment sales. The supply agreement between PKG and Office Depot is due to expire at the end of 2022. A renewal of the agreement is crucial to avoid a sales slowdown from 2023 in the paper segment.
Although PKG took over Boise Cascade in 2013 yet Georgia Pacific, International Paper, and WestRock are still counted as national competitors for the company, in addition to some smaller independent local players.
A low debt ratio of 1.9x vs the 10-year average of 2.1x, positive free cash flow for over 10 years, and adequate liquidity on the balance sheet to cover interest has helped PKG retain investment grade rating for many years. With Boise Cascade acquisition behind it, the company is now focused on organic growth.
With strong cost-containment and proven track record of double-digit ROIC, PKG is well-positioned to see a recovery in its ROE, which is currently at below historical average. Sitting at fair-valuations, PKG is a candidate for accumulation as a potential takeover target by International Paper or WestRock.
Major risks that could derail the EPS growth include inappropriate allocation of cash and inadequate diversity in product and geographic coverage.
Domtar is one of the largest manufacturers of uncoated free-sheet paper in in North America. The company deals in commercial printing, specialty papers and packaging materials, owning famous brands Cougar, Lynx Opaque Ultra, Husky Opaque Offset, First Choice and Sandpiper..
On Jan. 20, BofA lifted Domtar stock ratings to Buy from Neutral. The bank cited improving pulp outlook and cost reductions as a reason for the rating action. The bank also thinks Domtar has portfolio catalysts from the potential conversion of graphic paper assets to containerboard..
Domtar shares have gained about 47% over the past 6 months.
A total of 24 hedge funds in Insider Monkey’s database held stakes in Domtar entering the fourth quarter.
Click to continue reading and see the 5 Best Paper Stocks To Buy Now.
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Disclosure: None. 10 Best Paper Stocks To Buy Now is originally published at Insider Monkey.
