Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.
Legendary investor Jim Rogers once said: “The way of the successful investor is normally to do nothing—not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up.”
In other words, an investing opportunity is lying there in plain sight, and yet, most investors miss it. They miss it because they are usually chasing some hot sector like cryptocurrencies or the latest technology company. And a perfect example of what Rogers was talking about is occurring right now, thanks to the pandemic.
Investing in Cardboard Boxes
The packaging industry is not one that will interest those chasing the latest meme stock. But the pandemic has brought about a highly improbable transformation. The industry’s best-known product—the lowly cardboard box—is a red-hot item.
Pandemic lockdowns have forced literally millions of people to turn online for all sorts of items over the past year and a half. This in turn has increased the fortunes of the $350 billion paper-based packaging industry, which is at the heart of the e-commerce economy.
According to the consultancy Smithers, the volume of cardboard used to deliver goods from retailers to households last year surged almost 40%! Suddenly, boring packaging companies have become must-own stocks.
Since the stock market hit its pandemic low in March 2020, companies like Smurfit Kappa (SMFKY) and International Paper (IP) have almost doubled.
These two firms are among the heavyweights in a globally fragmented industry that also supplies the world with another necessity: paper.
Can It Last?
The big question surrounding the industry is, of course, whether its pandemic-induced boom can last.
I believe it can. While the pandemic accelerated the trend toward e-commerce, there’s no going back now to the way things once were.
In fact, industry executives say their biggest fear is their ability to keep pace with soaring demand. The estimated global demand for containerboard—the material used to make corrugated boxes—is 191 million metric tons. As Andrew King, the CEO of another packaging giant, Mondi (MONDY), told the Financial Times: “Markets are very tight. Box supply is constrained at any one time. We are selling out immediately.”
This is great news for the likes of International Paper and others in the industry: it means that while costs to make cardboard boxes are rising, the industry is immediately passing along those costs to retailers. In the past, passing along costs followed several months behind rising input prices.
The rises in cost are substantial. Over the past six months, prices for the cardboard that is recycled into new boxes jumped from an eight-year low of about $138 a ton to roughly $220.
If you invest in the packaging industry, you are not banking solely on the ways the pandemic accelerated the shift to e-commerce. The sector is also a natural winner as more and more consumer products companies replace the plastic packaging that is fouling our oceans with more sustainable alternatives. For example, L’Oréal (LRLCY) — the world’s biggest cosmetics maker—is launching paper-based containers under its Kiehl’s and La Roche-Posay brands this year.
The industry has a double-barreled tailwind in its favor. One of the biggest beneficiaries will be the aforementioned International Paper. Let’s take a closer look at the company.
International Paper is a leading global producer of renewable fiber-based packaging, pulp, and paper products. With manufacturing operations in North America, Latin America, Europe, North Africa, and Russia, the company has 50,000 employees and serves more than 25,000 customers in 150 countries. Net sales were $20.6 billion in 2020.
According to its website, International Paper “…produces packaging products that protect and promote goods, and enable world-wide commerce; pulp for diapers, tissue and other personal hygiene products that promote health and wellness; and papers that facilitate education and communication.”
It is well-positioned in very attractive customer segments. Its customer base comes from three sectors: food & beverage, 45%; durable goods (e-commerce), 25%; and non-durables like pharma and chemicals, 30%.
International Paper is North America’s leader in containerboard, with an expected 31% market share in 2021. Second, at a 21% market share, is Westrock (WRK). The company plans to spin off the weakest portion of the business, paper, which will leave the remaining company is a very strong position in the corrugated boxes business.
This business will still have more than $17 billion in sales (mostly in North America) and about 20,000 customers globally.
I rate International Paper a 4-star stock. It can be purchased at any price up to $73 a share.
— Tony DaltorioStart Collecting Daily Dividend Checks [sponsor]
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Source: Growth Stock Advisor