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Summary

  • Small cap stocks are often overlooked by investors when markets are at or near all-time or multi-year highs.
  • I believe that there are still undervalued/fairly priced small caps available that will make nice long-term investments.
  • Out of this group of Lumber & Wood Production And Paper & Paper Products stocks, I feel that Clearwater Paper is currently the best long-term investment option.

Overview

In April/May I wrote a series of articles that ranked the Dividend Champions based on a variety of metrics. Part 1 of that article can be found here.

In this series of articles, I will be ranking stocks of the S&P SmallCap 600 index. Part 1 can be found here. I will be using the following 10 metrics to gauge each stock by:

  • Revenue Growth (past ten years)
  • Earnings Growth (past ten years)
  • Price Returns (past ten years)
  • Return on Assets (trailing twelve months)
  • Return on Equity (trailing twelve months)
  • Return on Invested Capital (trailing twelve months)
  • Price to Free Cash Flow (trailing twelve months)
  • Debt to Equity Ratio (annual)
  • PE ratio (trailing)
  • PE ratio (forward)

The scoring system is simple. If there are 8 stocks in the industry being reviewed, then each metric will have a score between 1-8, with the best performing stock receiving an 8 and the worst performing stock receiving a 1.

For this article, I will be taking a look at the Lumber & Wood Production And Paper & Paper Products industries within the Basic Materials sector. Six stocks will be reviewed, so each metric will have available scores of 1 through 6.

Because of the higher number of stocks being looked at throughout this series, I will be relying on data provided by YCharts. Also, Boise Cascade (NYSE:BCC) is also in this sector industry; however, the company only has very recent data available, so I decided not to include it in this ranking.

The six stocks are:

  • Deltic Timber (NYSE:DEL)
  • Clearwater (NYSE:CLW)
  • PG Glatfelter (NYSE:GLT)
  • Kapstone Paper and Packaging (NYSE:KS)
  • Neenah Paper (NYSE:NP)
  • Schweitzer-Mauduit International (NYSE:SWM)

Deltic Timber

ValueScore
Revenue Growth (past ten years)65.09%4
Earnings Growth (past ten years)164.20%4
Price Returns (past ten years)63.01%2
Return on Assets (trailing twelve months)5.68%2
Return on Equity (trailing twelve months)9.52%1
Return on Invested Capital (trailing twelve months)6.63%1
Price to Free Cash Flow (trailing twelve months)58.11x1
Debt to Equity Ratio (annual)0.34x6
PE Ratio (trailing)31.36x1
PE Ratio (forward)52.23x1

Looking at the table above, you can see that Deltic Timber scored a combined total of 23. The company has a great debt ratio and has seen decent revenue and earnings growth, but has struggled to display strong returns on assets, equity, and invested capital. It also has the worst current price valuation based on both trailing and forward PE ratios out of this group of stocks.

Clearwater Paper

ValueScore
Revenue Growth (past ten years)61.78%2
Earnings Growth (past ten years)1.13K%6
Price Returns (past ten years)451.70%5
Return on Assets (trailing twelve months)6.62%4
Return on Equity (trailing twelve months)21.31%5
Return on Invested Capital (trailing twelve months)9.62%5
Price to Free Cash Flow (trailing twelve months)19.16x4
Debt to Equity Ratio (annual)1.07x2
PE Ratio (trailing)11.73x6
PE Ratio (forward)17.39x2

Looking at the table above, you can see that Clearwater Paper scored a combined total of 41. The company has seen fairly slow revenue growth, but has performed well in nearly every other financial category. Clearwater Paper also has seen the best earnings growth over the past ten years out of this group of stocks.

PH Glatfelter

ValueScore
Revenue Growth (past ten years)234.20%5
Earnings Growth (past ten years)231.00%5
Price Returns (past ten years)103.80%3
Return on Assets (trailing twelve months)4.37%1
Return on Equity (trailing twelve months)10.77%2
Return on Invested Capital (trailing twelve months)6.54%2
Price to Free Cash Flow (trailing twelve months)19.18x3
Debt to Equity Ratio (annual)0.65x5
PE Ratio (trailing)17.85x5
PE Ratio (forward)15.11x4

Looking at the table above, you can see that PH Glatfelter scored a combined total of 35. The company has seen fairly low returns on assets, equity, and invested capital; however, the revenue and earnings growth seen by PH Glatfelter has been substantial.

Kapstone Paper and Packaging

ValueScore
Revenue Growth (past ten years)670.00%6
Earnings Growth (past ten years)108.00%3
Price Returns (past ten years)1.11K%6
Return on Assets (trailing twelve months)6.85%5
Return on Equity (trailing twelve months)22.88%6
Return on Invested Capital (trailing twelve months)9.49%4
Price to Free Cash Flow (trailing twelve months)30.74x2
Debt to Equity Ratio (annual)1.80x1
PE Ratio (trailing)30.26x2
PE Ratio (forward)14.86x5

Looking at the table above, you can see that Kapstone Paper and Packaging scored a combined total of 40. Kapstone Paper has seen the best revenue growth and price returns out of this group of stocks over the past ten years, as well as, having the highest return on equity. One of the main negatives of the stock is its high debt level.

Neenah Paper

ValueScore
Revenue Growth (past ten years)61.95%3
Earnings Growth (past ten years)29.70%1
Price Returns (past ten years)54.23%1
Return on Assets (trailing twelve months)7.70%6
Return on Equity (trailing twelve months)20.40%4
Return on Invested Capital (trailing twelve months)11.34%6
Price to Free Cash Flow (trailing twelve months)13.20x5
Debt to Equity Ratio (annual)0.79x3
PE Ratio (trailing)17.88x4
PE Ratio (forward)16.92x3

Looking at the table above, you can see that Neenah Paper scored a combined total of 36. The company has fairly impressive returns on assets, equity, and invested capital, but has struggled to maintain significant revenue and earnings growth over the past ten years.

Schweitzer-Mauduit International

ValueScore
Revenue Growth (past ten years)28.15%1
Earnings Growth (past ten years)87.75%2
Price Returns (past ten years)186.50%4
Return on Assets (trailing twelve months)6.61%3
Return on Equity (trailing twelve months)12.78%3
Return on Invested Capital (trailing twelve months)8.61%3
Price to Free Cash Flow (trailing twelve months)10.86x6
Debt to Equity Ratio (annual)0.69x4
PE Ratio (trailing)19.48x3
PE Ratio (forward)12.24x6

Looking at the table above, you can see that Schweitzer-Maudit International scored a combined total of 35. The company has seen the lowest revenue growth out of this group of stocks over the past ten years, and the second lowest earnings growth. Outside of those two items, the company scored well in the other metrics and actually had the best price to free cash flow value and best forward PE ratio.

Conclusion

Deltic Timber was easily the lowest scoring stock out this group with a score of 23. Three of the other stocks scored a 35 or 36, while Clearwater Paper and Kapstone Paper and Packaging performed the best, scoring 41 and 40 retrospectively.

For Clearwater Paper's most recent quarter, the company saw a 3% increase in net sales compared to the same period last year and an increase in net earnings per share from $0.51 last year to $0.61 this year in Q2. With strong demand for its products and a continuing plan on improving operating efficiencies, Clearwater Paper should continue to see nice returns in the future.

Kapstone Paper and Packaging is performing well also. The company continues to see strong demand with solid mill backlogs and container bookings. While I think the company is a decent long-term investment opportunity, I believe that Clearwater Paper offers more upside potential.

Kapstone Paper and Packaging is currently trading at $32.27 with an EPS of $0.66 and a PE ratio of 49.00x. Clearwater Paper is currently trading at $67.55 with an EPS of $5.24 and a PE ratio of 12.90x. I believe that while both companies are performing well, Clearwater Paper is currently the more fairly valued company with a higher potential to show significant long-term returns to long-term investors. As always, I suggest any individual investor perform their own research before making any investment decisions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Outstanding Small Caps, Part 5: Clearwater Paper