Why Resolute Forest Products (RFP) Stock is a Compelling Investment Case

Chou Associates Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. In U.S. dollars, a Series A unit of Chou Associates Fund decreased by 32.3% in the first half of 2020 while the S&P 500 Total Return Index decreased by 3.1% in the same period. You should check out Chou Associates Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Chou Associates Management highlighted a few stocks and Resolute Forest Products Inc. (NYSE:RFP) is one of them. Resolute Forest Products Inc. (NYSE:RFP) is a pulp, paper, tissue, and wood products manufacturer. Year-to-date, Resolute Forest Products Inc. (NYSE:RFP) stock gained 8.6% and on September 8th it had a closing price of $4.75. Here is what Chou Associates Management said:

“As of June 30, 2020, the market price of Resolute Forest Products was US$2.11 per share, down 50% from the price at year end 2019. RFP has been a huge disappointment since our initial purchase some eight years ago. It shows how tough it is to turn around a troubled company despite the best efforts of management. Having said that, it is quite comical to experience how a commodity stock can be hammered beyond all logical comprehension. RFP paid a special dividend of US$1.50 a share in 2018, and it was trading as low as US$1.17 per share in April 2020. Back in March 2020, the company announced that it would buy back 15% of its common shares for US$100 million. At the lowest year-to-date price of US$1.17, the whole market capitalization would be approximately US$99 million. In other words, instead of buying back 15% of the company with US$100 million, it could repurchase 100% of the company at one point. RFP shares have since recovered 300% to US$4.69 as of August 25, 2020.

One bright spot has been their lumber operations. The high prices for lumber should make up the declines in newsprint and specialty papers. The COVID -19 pandemic has shifted the focus more towards lumber/pulp/tissue operations and I believe that should generate greater cash flow in the future.

In general, our experience with a commodity business that has virtually no pricing power is to be cautious when management talks about investing in new equipment or upgrades that would significantly lower the cost structure compared to its competitors. That may be true for six months to a couple of years, but in time, competitors will have a new cost structure that is as competitive if not superior to the company. It is the same treadmill where hardly anyone in the industry can make a decent return on the assets invested in the company. The same story can be seen repeatedly in various commoditized industries. There is no sustainable long-term advantage in a mediocre business with no pricing power. It is important not to get seduced by discount to book value. If the company cannot generate a decent return on book value over a long period of time, that book value is not worth much.”


In Q1 2020, the number of bullish hedge fund positions on Resolute Forest Products Inc. (NYSE:RFP) stock decreased by about 36% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with RFP’s growth potential. Our calculations showed that Resolute Forest Products Inc. (NYSE:RFP) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.