Paper/Forestry/Building Materials
In Mid-June, I wrote an article about a handful of highly related industries – paper, forestry, and building materials. As you can imagine, lots of the companies there have overlap under the “vertical integration is good” maxim. I bring this up for two reasons - one, because a Credit Suisse analyst today upgraded several companies in paper and forestry, saying that valuations are reasonable and demand should reach a trough a quarter or two out. In particular, the analyst singled out Temple-Inland (TIN) and Domtar (UFS) as two of the best-positioned companies in the sector.
The second has to do with a review of a few 13-F filings I checked over the long weekend; I was surprised to see Seth Klarman’s Baupost Group owned shares in both Domtar and International Paper (IP). While I didn’t notice any other paper companies in the last 13-F, perhaps I missed one. Also of interest in Baupost’s 13-F is the number of holding or acquisition companies in which they own stock - any explanations for this?

Of course, building materials continues to be a dud… again, I was way too early on my macro call there, although I remain confident in the long-term profitability of a handful of companies in the space, including USG. That has been hit extremely hard in the last month, and my main solace is not having a large allocation to it, as I’ve basically split my money between Primus (PRS) and cash.
One other company with (unfortunately for its stock price) building materials exposure, in addition to a few promising energy operations is Headwaters (HW) - a company I’ve followed off and on for several years, have liked, but never bought. I’ll have to do a follow-up post on that soon, because I like the coal exposure the company has, even if coal just got taken out to the woodshed.

Eggs
As I said yesterday, I continue to be very cautious on Cal-Maine (CALM), despite - or perhaps because of - the 5.5% pop following a piece in Barron’s touting the company. In addition to the metric on valuation per chicken in the flock, the next-most relevant data point (other than egg prices, which have resumed their fall) is a NASS report which shows hatchery figures. Of note, pullet chicks hatched in May are up 22% year-over-year; and with chicks hatched year-to-date up 6% YoY and 12% in May alone, hatching is accelerating.

Asymmetric Risk/Reward
Going back to Primus yet again, I last noted that Second Curve Capital - a hedge fund run by Tom Brown that owns more than 10% of Primus’ common stock - had become a block seller of the stock, and was knocking it down. Because we’ve gone a few days without seeing another Form 4 filing, and it doesn’t look like Second Curve sold enough stock to drop below the 10% filing threshold, I went back and did a bit of quantitative analysis relating to the performance of PRS on days where Second Curve was selling, and when it wasn’t. The results? During a time when the S&P 500 lost 7.7%, PRS lost 33% - that divided between an average -4.96% daily change when Second Curve was selling, and a -0.01% change when Second Curve wasn’t selling. For short-term trading purposes, this stock will be governed by whether or not Second Curve does further selling, which I anticipate is to raise cash to meet redemptions.

Market Internals
Finally, I did something unconventional at the end of June and analyzed the market internals to try to get some idea as to the likelihood of an intermediate-term market bottom. At that point, I noted the indicators I’ve seen used were reaching the start of the oversold level, but had yet to firmly enter oversold territory and certainly weren’t ready to “roll over” and turn positive - necessary for implying the market should rally. After several more days of relentless selling, the indicators are at extreme lows (as Raymond James Chief Investment Strategist Jeff Saut, among others, have noted) and at this point, it’s a matter of watching and waiting for a turn - no need to be trigger happy and jump on the first 50-point Dow rally or similar.

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Disclosure: I own shares of PRS and USG. The Boston College Investment Clubs owns shares of CALM, USG, and HW.