This Little-Known Stock Could Have 30% Upside

Throughout my career, I’ve developed what I see as a habit (others may see it as a quirk) of gravitating toward genuinely un-sexy stocks while the herd seems to be chasing the sexy ones of a particular moment. As the tech boom began to strut its stuff in the mid 1990s, I remember recommending patently low-tech to no-tech names.

Boring property casualty insurer USF&G was one name. Why? The space was consolidating and it looked like a takeover target. It turns out I was right. But for many investors, if it didn’t have anything to do with routers or the World Wide Web, it was of no use.

What’s so sexy about insurance? I don’t know. Ask Warren Buffett. Maybe he can tell you. He built his entire Berkshire Hathaway (NYSE: BRK-B) empire on the backs of his insurance holdings.

Well, I would definitely categorize P.H. Glatfelter Co. (NYSE: GLT) as un-sexy. Glatfelter is a leading manufacturer of specialty papers and fiber-based paper products. Fiber-based paper products include the materials used to make teabags, coffee filters and the highly absorbent material used in feminine hygiene products and adult diapers.

But hey, someone’s gotta make that stuff. That’s what Glatfelter does. And, naturally, they get paid to make it — quite well, in fact. Now, I wouldn’t say that all of the products Glatfelter manufactures are completely un-sexy. If you’re reading this in the evening or on the weekend, while enjoying a nice, icy cold brewski, look at the shiny metallic label. That’s Glatfelter’s work.

Historically, the paper-making business has always been cyclical. When the economy is rockin’ and rollin’, business is good. Office paper, slick magazine paper, newsprint and, especially, packaging are all on the upswing. When the economy’s bad, you’d think no one is ever going to write anything on a piece of paper again or buy another magazine (well… maybe that’s not too far from the truth, with the rise of tablets and e-readers).

But some paper companies defy that trend by making themselves into more of a staple manufacturer. Coffee filters and maxi pads are relatively recession-proof. In fact, Glatfelter, in some ways, reminds me of a much bigger paper company that owns a very defensive space: Kimberly Clark (NYSE: KMB). “Honey… times are tough. We’re going to have to cut back. Buy less toilet paper.” I don’t think so.

It’s no wonder insiders have been buying shares in bulk…

Whether or not you find Glatfelter’s core business sexy or not, there’s little argument the numbers are extremely attractive. At around $12 a share, the stock trades at just 10.3 times trailing earnings with a 2.9% dividend yield. What’s more, the stock is priced right at book value and about 0.4 times sales.

But the 2010 year-end numbers are where the excitement really is. Adjusted earnings per share (EPS) grew by 38% compared with 2009, and business unit operating income grew 23% for the same period. This helped the company generate nearly $132 million in free cash flow at year-end — pretty strong for a company with a $549 million market cap.

2011 looks just as promising. Analysts are forecasting 25% growth in operating earnings per share as well as 2.5% cash-flow growth. A lot of the growth will come from new products. Last year, 54% of Glatfelter’s net sales came from new products. Management set the goal for 50%. Obviously, the company is good at executing. Management is also good at knowing when to say “good bye.” The company has a mandatory retirement age of 75. With a mandatory retirement age, Glatfelter must maintain an effective succession plan.

One last positive management trait: ownership. Since the end of 2010, insiders have collectively purchased or exercised options to purchase more than 130,000 shares.  The most recent and significant was the CEO’s purchase of more than $300,000 of the company’s stock. A purchase like that is a big deal when you’re looking at a $500 million market cap company. I don’t think it would be as big of a deal if it were Google (Nasdaq: GOOG) or some other gigantic company, but in this case, it signals confidence. However, what’s interesting is that while the stock popped a little initially, it settled back down and is basically where it was three months ago.

There’s some kind of opportunity there. Those who know best seem to think so. Naturally, though, there are always headwinds. The most immediate and significant is commodity price inflation putting the squeeze on margins.

Action To Take –> Glatfelter is a textbook, deep-value outlier. Based on the company’s ability to deliver, why isn’t the price higher? There are probably a couple of reasons — lack of analyst coverage, for one. The other could be guilt by association. Although Glatfelter operates in specialized niches that are highly defensible, the market may be looking at the company as if it were merely a cyclical paper manufacturer.

Glatfelter shares currently trade around $12.20 and yield 2.9%, a nice bonus for a sales/earnings-focused company.  With earnings growth approaching 30%, and a market niche that it virtually owns, a target price of $16 puts the stock at around 1.5 times book value, which is still cheap.

P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America’s electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here’s what’s going on…