Editor’s Note: We are providing an equity trade for conservative investors and an options trade for aggressive traders.

EQUITY TRADE INSTRUCTIONS

Symbol: IP (NYSE)
Limit: Buy below $48
Holding Period: 5 months
Target Price: $55
Target Gain: 15%

OPTIONS TRADE INSTRUCTIONS

Symbol: IP190418C00045000
Limit: Buy the Call option below $5
Strike Price: $45
Expiration Date: April 18, 2019
Target Gain: 100%

COMPANY DESCRIPTION                     

International Paper Company operates as a paper and packaging company primarily in North America, Europe, Latin America, North Africa, India, and Russia. It operates through three segments: Industrial Packaging, Global Cellulose Fibers, and Printing Papers. The company sells its products directly to end users and converters, as well as through agents, resellers, and paper distributors. International Paper Company was founded in 1898 and is headquartered in Memphis, Tennessee. Link to company website.

TRADE RATIONALE

There is a good reason why “smart money” investors such as pension plans and mutual funds hold 85% of International Paper’s stock. The company is a cash flow machine that pays a big dividend and has plenty of money left over to weather the occasional economic turndown.

IP is one of only four stocks in the S&P 500 Index that currently earns a perfect score of 10 from my IDEAL Stock Rating System due to its high dividend yield (4.4%), rapidly improving cash flow (operating C.F. doubled during the past twelve months), and low valuation (8.4 times forward earnings and less than 1 times sales).

From a technical perspective, IP’s RSI recently rose above 50 after its share price crossed above its 50DMA. If it breaks through resistance near $50 then it should have smooth sailing up to $56.

What is going to make that happen? Two things:

• I believe the stock market rotation that got going in earnest last month will continue into the first half of 2019. With interest rates on the rise, bonds can only decline in value so income investors will transition into high yielding stocks with low payout ratios, and IP fits that bill perfectly (its payout ratio was only 25% as of the most recent quarter).
• As the stock market rotates from high-multiple growth stocks to low-multiple value plays, the discrepancy between those multiples will narrow. I expect the forward PER for IP to increase from 8.4 to 9.5 over the next five months. Combined with a modest increase in EPS, that should drive its share price up to the $55+ range.

In short, I am not expecting anything unusual (good or bad) to occur with International Paper, but I am expecting the stock market to assign a higher valuation to IP in response to a very different set of economic and political factors in 2019.