Paper Profits

Despite all the trouble with Fannie Mae and Freddie Mac, despite Lehman’s near inevitable demise, despite plunging retail sales and record home foreclosures, believe it or not there is still a bull market somewhere. And Cramer said it’s in paper and packaging companies.

No, it’s not that exciting, but it is profitable. And we’ve said a thousand times that Warren Buffett made billions on boring. So far be it for us to turn up our noses at what looks like a real moneymaker.

These paper and packaging companies have one thing in common with a lot of the other stocks Cramer likes right now. They’ve increased prices and now their raw costs have come down. The increased margin makes it more likely we’ll see an earnings beat at the next quarter.

Of all the names in the group, Cramer likes Packaging Corp. of America. He recommended sector peer Temple-Inland back in April, but that stock’s had a nice 37% run since. The sector on the whole is doing well, but PKG has missed out on the action. Cramer thinks it’s time for this stock to play catch-up.

As we said, PKG’s energy costs have come down, which is key because energy’s one of a paper company’s biggest expenditures. PKG gets 50% of its energy from coal and another 9% from natural gas, so the declines in these resources should boost earnings.

Supplies of containerboard, a key product, are tight, too. They have been all summer. That, combined with those increased prices, is driving business for PKG.

Cramer likes the dividend yield here. PKG pays out 4.7%, which is better than Temple-Inland’s 2.2% and International Paper’s 3.4%. Basically, you’re being paid to wait for PKG to catch up to its peers.

The strategy here is to buy PKG before the next containerboard price increase, which Wall Street expects by year’s end. And at $26, the stock is just too cheap. PKG’s trading at just 13.5 times earnings even though the company’s earnings should grow 24% in 2009.

And another thing to consider is that this type of year-over-year growth is just what the mutual funds like to see. If these funds start buying PKG, that will just send the stock higher.

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