Dow Stocks: Don’t Chase This Dow Stock

| January 14, 2011 | 0 Comments

With the Dow Jones Industrial Average closing in on 12,000, you’re probably looking at more than a few Dow stocks to add to your portfolio. And why not?  Given the strong outlook for corporate earnings growth this year, many Dow stocks are bound to provide nice gains in 2011.

I too have been taking a closer look at Dow stocks.  And I’ve found several offering solid growth potential and a healthy dividend to boot.

However, there’s one Dow stock you should avoid like the plague… International Paper (IP).

TIP is a diversified paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia, and North Africa.  They make containerboard, uncoated freesheet printing paper, and coated paperboard products.  And they own and manage 200,000 acres of forestlands in the US.

At first glance, IP looks like a safe growth play for 2011.

Last quarter the company posted record earnings thanks to price increases and restructuring benefits.  Earnings estimates for 2010 and 2011 have been moving higher.  And earlier this week, IP bumped their dividend by 50%.

What’s more, the shares have been on a tear.

Since hitting a low of $19.33 in late August, the shares have been moving higher in a solid uptrend.  Yesterday the shares closed at $28.87 for a terrific 49% gain off the August low.

Sounds great right?

Not so fast.

If you dig a little deeper, you’ll see some dangerous cracks in the foundation of this seemingly solid stock.  The one I’m most concerned about involves the company’s Printing Papers business.

This important business segment accounts for about 24% of sales and 22% of operating profits.  They provide uncoated freesheet printing papers used in books, magazines, newsprint, and envelopes.

While Printing Papers had strong performance in 2010, I see demand dropping like a stone.

E-readers and tablet PCs are rapidly replacing printed books and magazines.  Demand for these hot, new gadgets is off the charts.  Gartner estimates sales of tablet PCs will more than triple in 2011.  And they’re projecting sales of e-readers will jump 68%.

Want proof… just look at recent sales numbers for Apple’s iPad and Amazon’s Kindle.

What’s more, a recent survey by JP Morgan shows an astounding one-third of all internet users plan on buying an e-reader.

This makes perfect sense.

Why spend a fortune on printed books when you can get e-books for a fraction of the price?  And you can store thousands of e-books on a tiny device that fits in your pocket.

As demand for e-books grows, publishers are sure to cut back severely on the amount of paper used to print books and magazines.

What’s more, the latest figures from the US Postal Service show e-mail is continuing to push snail mail toward extinction.  Last year, the Postal Service lost a stunning $8.5 billion.  That comes after losses of $3.7 billion and $2.8 billion in the previous two years respectively.

The huge losses stem from a steady and steep decline in mail volumes. Since 2006, mail volumes have dropped a whopping 20%!

More people are using email, facebook, skype, text messaging, and other electronic means to communicate.  Snail mail is clearly going the way of the dinosaurs.

This means demand for paper and envelopes should decline steadily for years to come.

As you can see, these powerful trends in new technology are lining up to deliver a death blow to IP.  And with IP shares trading just under their 52-week high, now is not the time to chase this stock.

In my opinion, these shares are way overvalued.

IP’s earnings are projected to grow at a meager 2.5% a year going forward.  But the stock is trading at a P/E of 14x the 2010 estimate and more than 10x the 2011 estimate.  How does a company with such anemic growth deserve a P/E anywhere near the market average?

The short answer… it doesn’t.

These shares are ripe for a major sell off.  If you’re looking for a good Dow stock to add to your portfolio, don’t waste your time with IP right now.  This is one paper stock on the verge of getting shredded.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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