This Once Dead-Money Blue Chip is in a Major Uptrend

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I've played the stock market long enough to remember when the consensus judgment was that the computer would result in a "paperless" society and that paper makers would implode. While those doomsday predictions didn't prove correct, it was true that paper stocks were largely dead money during the first decade of this century.

Take industry giant International Paper (IP) for example. As late as 2004 it traded in the mid-$40 range. When it finally bottomed in 2009 after several years of steady decline, its price was well under $10. Now shares have rebounded to their highest level in more than a decade.

What gives? In one word: containerboard.

Used in cardboard and corrugated boxes, the increase of online shipping is spurring containerboard demand.

International Paper is the largest containerboard manufacturer in the U.S. The company produces about 10 million tons of it each year. It also makes coated paperboard used to package food, cosmetic and pharmaceutical products. In addition, it is one of the world's leading producers of printing and writing paper.

According to Fidelity Investments, in 2013, the price for containerboard jumped more than 15% to $740 per ton after holding steady at $640 per ton for two years.

Fidelity cites consolidation in the paper industry, as a major contributing factor to the price increase. The top three producers of the product controlled 64% of the market in 2012. That contrasts with just 29% in 1995. With this consolidation, comes pricing power. 

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Low energy costs, for both production and shipping, may also act as tailwinds for future profitability.

From a technical perspective, IP appears bullish.

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IP Stock Chart

Rising off a June 2012 low near $26, shares formed a major uptrend and have nearly doubled to date. For the majority of the stock's ascent, the uptrend line has run parallel to the 50-week moving average, which currently intersects around $46.

In April, shares peaked above $48, but had trouble taking out this level and retreated to just below $42. A shelf of resistance was established at the $48 level.

In July, the stock managed to temporarily break above $48 resistance, hitting a short-lived multi-year high above $49. Shares then slid, but tested the $49 level again in September. Unable to penetrate round number resistance at $50, the stock retreated in late October to the high $42 range. Note the test of major support marked by both the rising 50-week moving average and the intersection of the major uptrend line.

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After surviving the test of support, by November, shares regained steam. In early December, the stock hit a high of $49.52, but was again turned back by $50 round number resistance. For the past four weeks, shares have been stuck in a narrow trading range between $48, which currently acts as support, and resistance at $49.52.

If shares can decisively break $50 resistance, they could move higher quickly as no nearby resistance would be in sight.

Of the 17 analysts who follow the stock, the most optimistic price target is $62 with the mean target just below $55.

The bullish technical outlook is supported by solid fundamentals. The company is scheduled to report fourth-quarter and full-year 2013 results on Feb. 4.

Analysts anticipate fourth-quarter revenue will increase 4.6% to $7.4 billion from $7.1 billion in the comparable year-earlier quarter. Full-year 2013 revenue is expected to rise 5% to $29.2 billion from $27.8 billion last year.

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The earnings outlook is even more positive. Analysts forecast fourth-quarter earnings will jump 26% to $0.87 per share from $0.69 in the comparable year-earlier period. And full-year 2013 earnings are expected to rise 21.5% to $3.22 per share compared to $2.65 last year.

The company pays an annual dividend of $1.40 per share for a yield of about 2.9%. Since May 2009, the quarterly dividend has steadily increased from $0.02 per share to its current quarterly payout of $0.35 per share. The yield should help provide a floor under the share price.

Risks to consider: Like many industries, the paper and shipping box sector is directly tied to overall economic health. When economic times are good, consumers are more likely to order goods shipped in containerboard boxes. The reverse is also true. So long as the economy continues to grow, strong demand for containerboard should continue.

Recommended Trade Setup:

-- Buy IP at $50.19 on a break above round number resistance
-- Set stop-loss at $45.87, just below support marked by the intersection of the major uptrend line and the 50-week moving average
-- Set initial price target at $57.95 for a potential 15% gain by late 2014

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