Best Stocks of 2016: Domtar Corp (USA) (UFS) Could Make a Comeback

In spite of good earnings, UFS hasn't been able to keep positive momentum

By Hilary Kramer, Editor, GameChangers

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Editor’s note: This column is part of our Best Stocks for 2016 contest. Hilary Kramer’s pick for the contest is Domtar Corp (USA) (NYSE:UFS).

Best Stocks of 2016: Domtar Corp (USA) (UFS) Could Make a ComebackThe last time we took a look at Domtar Corp (USA) (NYSE:UFS), my pick for this year’s Best Stocks for 2016 competition, the stock had suffered from increased volatility due to pressure from global macroeconomic concerns.

Most of the company does its business in the United States and Canada, so worries that a stronger dollar would make the company less price competitive had weighed on the shares.

The ride since then has been more positive. The company impressed with second-quarter earnings of 61 cents a share and investors quickly sent the stock up almost 10%. The reason for the spectacular beat was lower-than-expected downtime and maintenance costs, as management found out that their production facilities were in better shape than had been anticipated.

A recent increase in paper prices also boosted results.

But UFS stock was unable to extend its sharp post-earnings rally, dipping slightly at the beginning of September and trading in a tight range for a few days afterward.

Impacts on UFS Stock

I don’t think the pullback has much to do with the company itself as performance has been strong — but I do think the investors trading UFS stock are still too concerned about global scares, which is why its price has been so erratic.

Firmer prices and continued improvement in operations should help boost third-quarter results, and investments in the company’s consumer products division along with the recent announcement of the restructuring of a South Carolina fluff pulp mill, will likely add stability to cash flow over the long term.

With maintenance costs now expected to decline the rest of the year and the price increase of paper in place, I believe UFS stock has a chance to earn $3 a share in 2016, up nicely from current estimates of just $2.34 a share.

And even if the stock does see more volatility in the coming months, its 4.4% dividend is a healthy incentive.

I still think there’s some upside ahead here and find UFS attractive below $38.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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