The S&P 500’s materials sector has been one of the worst performers this year, posting a 6.5% loss for the year through last Thursday vs. a 0.7% gain for the market generally, as measured by the S&P 500. But with news that Koch Industries will buy the paper maker Georgia-Pacific Corp., the materials sector is getting a fresh look from Wall Street.
The S&P Materials Sector SPDR ETF (Amex: XLB) jumped 3.9% as of last night’s close since the end of trading last Wednesday, November 9. Traders are wondering if there’s more to come as the market revalues the formerly languishing materials sector.
Georgia-Pacific is a member of the materials fraternity, and the stock’s price surge (it jumped by more than one-third yesterday) has contributed to the double-take on the sector. Indeed, Georgia-Pacific’s 2.8% weighting in XLB (as of September 30) was a relatively distant 13. At the top of the ETF’s weighting roster was Dow Chemical (12.6%), followed by EI DuPont (12.2%), and Alcoa (6.7%).
But in looking at the other stocks in the sector that caught fire, it’s clear that the paper connection is the spark that’s fired up investors’ imaginations. Notably, shares of paper/timber firm Weyerhaeuser (with the sixth highest weighting in XLB) soared yesterday before pulling back a bit. Dow Chemical, EI DuPont, and Alcoa, by contrast, were either flat or down slightly.
In any case, the sight of Weyerhaeuser shares soaring is hardly common. The stock has essentially gone nowhere in the 21st century. In addition, valuations on such companies, which are typically rich in land and timber holdings, have been relatively low, according to some analysts. No surprise there, in part because valuing real estate and trees isn’t a Wall Street forte. Thanks to the proposed Georgia-Pacific deal, however, a revaluation may be in the works.
“Georgia-Pacific was our top pick in North America,” Don Roberts, a CIBC World Markets analyst in Tornonto, told AP via BusinessWeek yesterday. “We thought it was undervalued. Obviously, Koch agrees.”
The wider world of finance stood up and took notice as well. “When you have a catalyst like this, it causes investors to look at the stocks in terms of merger-and-acquisition multiples and less so in terms of cash-flow multiples,” Daryl Swetlishoff, a Raymond James analyst, explained in a story from Globe and Mail yesterday. “The Georgia-Pacific acquisition has focused investors to identify situations where the underlying asset value is out of whack with its current share price.”
Industry-specific sentiment shifts born of one merger deal can nonetheless be fleeting, in part because there are only a handful of companies on a scale comparable to Georgia-Pacific in the timber/paper business. As a note of caution, consider that while the large-cap materials sector has taken flight recently, the mid-cap and small-cap counterparts aren’t less than bubbling in the wake of the Georgia-Pacific news. The large-cap materials sector climbed nearly 1% yesterday, but mid-cap materials could manage only a 0.1% gain, and small-cap materials actually lost ground, shedding nearly 0.8% yesterday, according to the relevant S&P benchmarks.
Wall Street is eager for some good news, and Georgia-Pacific delivered. But there’s a thin line between finding undervalued assets and searching desperately for reasons to push equity prices overall higher in an era of uncertainty.