Temple-Inland Rises in Anticipation of Positive Earnings

In the early stages of bull markets, certain stocks will often make substantial moves before their earnings power becomes visible. In these situations, the price action clearly displays the market’s discounting mechanism at work – in effect, stocks begin to rise as businesses bottom out, already anticipating better days of positive growth ahead.

With this in mind, we established a small probe position in packaging producer Temple-Inland Inc. (TIN) late last week. Earnings are slated to come out Thursday, July 23^rd. We like this trade for the following reasons:

• Prices have stabilized for cardboard box material producers, a sign that the sector may have bottomed. Producers have been doing their part by keeping inventories lean – a key factor in maintaining steady prices for containerboard in June at $540 per ton.

• TIN reported blowout Q109 earnings of $0.30 EPS versus the consensus estimates of $0.05 a share. While estimates have risen over the past 90 days, one has to wonder whether Q209 estimates of $0.11 are still too low. The strength in the stock seems to suggest so.

• Technically, TIN’s price action reveals solid institutional accumulation. After tripling from its March lows, the stock has based out for the past 10 weeks between $11-15. A look at the 1- year, weekly chart shows a number of positive attributes:

TIN one-year weekly chart

Source: StockCharts.com

TIN has forged higher highs and higher lows for two weeks in a row. As the stock heads into earnings on Thursday, July 23^rd, odds favor a breakout to $14.50-16.75 in our opinion. Looking further out, we believe TIN’s stock price is nearing an important inflection point that could send the stock to the high teens by year-end.

We plan on adding to this position on any move above Friday’s high, $14.22. All signs point to a turn in the company’s business and an impending breakout in its stock.

TIN STOP LOSS: $13

Disclosure: We are long TIN stock and in the money August calls for the accounts we oversee.