Disposable Paper Products Make Their Lewd Return! (IP)

Before we get to the day’s trade a quick word on our editorial schedule for the coming weeks.

PAY ATTENTION!

To begin, next Monday, October 10^th, is the opening of the holy week of Sukkot and will therefore necessitate a pilgrimage to the Holy City of Yerushalayim.  There will therefore be no letter.

We’ll return next Thursday, October 13^th, during the intermediate days of the holiday with a postponed version A Jew and His Money.

The following Monday, October 17^th marks the holy convocation of Shemini Atzeret (Simchat Torah), a holiday necessitating repeated calls to the Holy Torah of G-d and a bounty of feasting and rejoicing.  Again, there will be no letter on that day.

We’ll return that Thursday, October 20^th with our regularly scheduled A Jew and His Gold.

And from there, bli neder, all will return to normal until the coming of our righteous redeemer, the holy anointed one, Mashiach ben David, may he arrive speedily in our days.

On With It.

Today’s trade is a Pulp and Paper inferno that offers a wickedly hot 4900% return in almost no time at all.

The underlying is Memphis’ International Paper Company (NYSE:IP), global leaders in the packaging business, producing everything from containerboards to saturating kraft to fluff for use in the manufacture of absorbent hygiene products, such as baby diapers, feminine care and adult incontinence marketables.

Too late…

Fundamentals for the company are perfectly sound, and they look like this –

• P/E is 8.80 and Forward P/E is 7.54.
• Dividend Yield is 5.63%.
• Price to book is just 1.34.
• EPS this year were up 391.90% (albeit from a depressed year earlier), and…
• EPS for the next five years are expected to grow at 8.20% per annum.

All told, a reasonable set of numbers.

The company will be announcing earnings on the 27^th of October, before the bell, and our trade has taken that important date into consideration

In other news, the company is in the process of buying back half a billion dollars in debt, a development that appears to have stemmed the stock’s decline, as investors are reassured the company is in a better position to weather a tougher business climate.

Now look at the chart –

Technically, we’re looking at –

1. An oversold RSI read from two weeks back (in green), and…
2. A MACD indicator that is now on the rise. Taken together, these two speak to potential near term strength for the shares.
3. Price-wise, we see a number of important developments:
4. First, we have a precise 50% decline in the shares from their top, back in June of 2021 (not seen on chart), from $64.65 to $31.70 (50.96%). The 50% line regularly provides a reliable and proven source of support.
5. We would note, also, that IP’s decline from her recent June highs was 38%, against the broader P&P industry’s 22% fall. That difference is overdone, in our estimation – particularly since the company’s tender to buy back outstanding debt – and should make for a meaningful bounce higher once the buying begins.
6. Next, a 40 day trend channel (in red) now appears on the verge of breaking. When that occurs, we should see a good measure of technical buying commence.
7. With all the moving averages unfurled and trending downward, the stage is set for a strong retracement. Our experience is that the timing of such bounces regularly aligns with the aforementioned MA pattern (in purple)…
8. And particularly so, when volumes ramp up as they have here (in black). The last three weeks have seen at least double the daily average truck on the stock.  And that’s likely a sign of weak investors capitulating to those with some foresight.
9. Finally, there’s a gap to $49.50 that needs filling (in blue). That drop occurred when FedEx announced it expected a huge decline in business over the coming year.  Since less shipped products = less cardboard wrapping, IP also took a Tatum-like hit.

All of which supports our contention that IP shares are about to rise.

And we’re playing it like this –

A Jew and His Gold recommends you consider selling the IP January 20^th 35/32.50 PUT spread* for a credit of $1.25 (3.70/2.55) and buying the IP January 20^th 32.50/35 CALL spread** for $1.30 (2.85/1.55).  Total debit on the affair is $0.05.

[*Sell the 35 PUT and buy the 32.50 PUT.  **Buy the 32.50 CALL and sellthe 35 CALL.]

Rationale: for a nickel outlay we open the way for a huge $2.45 haul (4900%).

Max loss is $2.55 (difference between the PUT strikes plus the initial debit).

Breakeven on the trade occurs at $33.80, and with price now at $32.87, that entails a rise of just 2.8%.

Full winnings are achieved on a climb of 6.4%.  And in the current whipsaw trading environment, that’s perfectly possible.

We’ve got better than three months to get there, race fans!

Looking good.

May the One, true G-d of Israel help us along the way.

Many happy returns!

Matt McAbby

Follow @HughLOHaynew