Value investors look for stocks thatoffer low risk. The idea is
to buy a stock at a price level that should be near a low as
measured by the fundamentals. Some value investors look for stocks
with sound business models that are selling at a low
price-to-earnings (P/E ) ratio, for example.
There are a number of other factors that they can screen for and
many long-term investors have found success with this model. From a
trader's perspective, the idea of buying and waiting usually seems
unappealing because it often means having to hold stocks that don't
perform well for years.
In order to be successful, value investors need to be patient.
An undervalued stock might remain undervalued for some time,
andwill usually only go up in price when other investors discover
the stock. It might take years for other investors tospot a
company, and ideally, avalue stock offers adividend that allows
investors to get paid while waiting for others to recognize the
value they found.
Schweitzer-Mauduit International (
is an example of a value stock that could be recognized soon.
Schweitzer-Mauduit is a largely unknown small cap, which has been
in the paper business for 450 years and has solid growth prospects
for the future.
Schweitzer-Mauduit is the world's largest producer of the papers
used by cigarette manufacturers and controls 36% of themarket among
cigarette manufacturers located outside of China. Tobacco is a
slow-growing industry, but Schweitzer-Mauduit holdpatents on Lower
Ignition Propensity (LIP) paper, which is becoming more widely used
in the industry and increasingly required by regulators around the
The company's products can also be used outside the tobacco
industry as well. The company's website points out, "Amazingly, the
commercial applications for engineered paper just seem to grow."
Among the new uses for its products is battery separator paper.
Revenue in the past 12 months totaled $821 million andearnings
per share (
) reached $3.45. Schweitzer-Mauduit is a value stock with a P/E
ratio of 11 and is expected to grow itsEPS at an average rate of
about 15% a year for the next five years. The company also pays a
dividend of 60 cents per year, an amount that is only 17% of its
EPS. Dividend-paying companies are currently using an average of
about 30% of theirearnings to pay dividends and the long-term
averagepayout ratio is more than 50%. This means Schweitzer-Mauduit
could raise its dividend significantly in the future, a possibility
that might be attractive to value investors.
The monthly chart shows the potential this stock offers. A
basing pattern has formed over the past two years and offers aprice
target that is more than 30% above the current price.
Schweitzer-Mauduit has moved above resistance in the past month,
and thestochastics indicator isbullish but far from overbought
indicating that this breakout could accelerate.
Earnings are scheduled to be released at the end of January, and
that could be the news that attracts attention to this stock.
Traders might want to take advantage of that possibility by using
March $37.50call options, which are trading near $2.05. These
options would be profitable if Schweitzer-Mauduit reaches $39.55, a
price that would be about 10 times next year's expected earnings.
Given a good earnings report, I think Schweitzer-Mauduit could
reach about $43 early next year, where it would again be priced at
about 11 times next year's earnings.
Value investors often use the end of a quarter or the end of the
year to rebalance their portfolios. Schweitzer-Mauduit's
lowdividend payout ratio could be a factor that gets noticed on
value screens, and the low valuations combined with strong growth
prospects could make it a buy for value investors. Traders can take
positions that benefit from that possibility with a short-term
Action to Take -->
Buy Schweitzer-Mauduit March 37.50 Calls at $2.25 or less. Set
stop-loss at $1. Set initial price target at $3 for a potential 33%
gain in three months.
This article originally appeared on TradingAuthority.com:
This Unknown Small Cap Could be a Breakout Star