By: Mat Lystra, Senior Research Analyst
The Teldar Paper company was the fictional target of a hostile takeover by corporate raider Gordon Gekko in the now classic 1987 movie Wall Street. In the 30 years since Wall Street debuted, the non-fictional paper industry has undergone major reorganization and consolidation of the sort that would have proven Gekko a visionary. The Russell Style Indexes also got their start in 1987 and have served witness to these dramatic changes. Using the companies that currently comprise the forest products industry as examples, we can see how style shifts over time tell a story of the evolution of an industry.
The Russell Style Indexes categorize the members of the Russell 1000® Index as either “growth,” “value” or some blend of the two. Growth companies are generally considered to be more closely tied to the economic cycle and are valued for their potential future earnings growth. Companies categorized as value generally have discounted market prices relative to their earnings or other fundamental measures.
Style classification of the Russell 1000 constituent companies relies on a defined methodology that uses fundamental characteristics and growth forecasts. Of the 16 forestry products manufacturers that were members of the Russell 1000 Index at the end of 1987, only four remain: Glatfelter (GLT), International Paper Co. (IP), Kimberly-Clark (KMB) and Sonoco Products (SON).
You can see below how the market values of each paper company have fluctuated over the last 30 years. In 1995, KMB completed a $9.4B merger with Scott Paper that paved the way for new growth. Just a year later, IP acquired Federal Paper Board in a deal worth $3.5B. SON and GLT internationalized their operations, but did not strike the type of high-profile deal Gordon Gekko would surely have pushed for.
Gekko sought to identify, by any means necessary, companies with undervalued assets that could be bought and resold at higher prices—making him something of a value investor, albeit one of a morally-challenged kind. Similarly, but ethically, the Russell Style methodology identifies companies exhibiting “value" traits using a set of fundamental indicators.
One of those indicators is adjusted book value-to-share price (adjusted B/P). The adjusted B/P is used to generate a probability of value for every company in the Russell 1000 Index. As an example, we can chart the value probability of KMB over time along with its adjusted B/P. In the chart below, point 1 marks when the company first exhibited value traits. Between 1999 and 2000, point 2 marks the historical peak value probability when KMB’s rising adjusted B/P made the company standout. At that time, most companies’ B/P values were decreasing, leading to what is now referred to as the “dot com bubble.” Points 3 and 4 indicate receding value probability following the financial crisis and some recent accounting charges related to a retirement plan buyout.
Since the debut of Wall Street, and the 30 years that have followed, the Russell Style Indexes have marked the dramatic changes in the US equity market. The forest products industry is just one example of how the Russell Style Indexes can be foundational benchmarks with which to assess or help structure a US equity allocation. These indexes provide accurate reflections of the life cycles that sectors and companies go through. And unlike corporate raiders like Gordon Gekko, the Russell Style indexes use a rules-based and transparent process that does not require illegal insider information. If he’d only had the sense to use a Russell Style index...
For a more detailed analysis of this story, please see the FTSE Russell paper Whatever happened to Teldar Paper?
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