This Week's Hottest Sector

Newton's law of inertia doesn't always work in the stock market. For example, the S&P 500 index has lost about 7% of its value since Dec. 31 -- yet transportation companies like Ryder System (NYSE: R) and Pacer International (Nasdaq: PACR) are in the green.

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Stocks in the same sector have a tendency to move in tandem, regardless of overall market conditions. After all, stocks in the same industry generally derive their revenue from similar sources, and they're similarly affected by news, legislation, or events.

Each week, we'll take a look at the hottest sector over the past five days, according to SmartMoney.com's "Sector Tracker." Then we'll cross-reference the individual equities against investor data on Motley Fool CAPS, the Fool's free investing community. CAPS can give us a better feel for what both individual and institutional investors are saying about these stocks.

A surprising sector
This week's top sector is "paper," up 13.5% over the last five days. This group includes:

Hey, what about Dunder-Mifflin?
Michael Scott would be proud of the paper industry's surge this week, largely brought on by the positive surprise in International Paper's fourth-quarter earnings report. As one of the world's largest paper producers, International Paper naturally has a "pulling effect" on the rest of the sector.

The report showed that global demand for paper and packaging materials from Brazil and Europe helped boost margins, increase sales, and offset declines in the U.S. Paper investors are hoping for similar positive news from Domtar (reporting tomorrow) and Neenah, which reports in March.

Over on CAPS, investors seem unsure about the paper industry, giving its components mostly two- and three-star ratings. Some believe paper is a hidden winner, while others think it's past its prime. The former opinion was recently expressed by player nightowljmp on the International Paper page: "Steady profits, low P/E + PEG, and a nice dividend yield will cause this stock to outperform the rocky market over the next couple years."

While International Paper does have a low P/E relative to the S&P 500 and the industry, the company will need to boost its earnings-growth estimates to about 10% in order to move its PEG (currently at 2.59) to a more reasonable level.

CAPS player DukeTimberGuy, over on the Neenah Paper page, offers a bearish opinion on the future of paper: "This is an industry that has not outperformed the market consistently for many years. Global competition kills this segment."

That's true. Over the past 10 years, for example, both International Paper and Wausau Paper have posted negative returns, while the S&P 500 has increased by 34%. Foreign rivals include Japan's Oji Paper and Finland's UPM-Kymmene.

As for my opinion on paper, I'm with the CAPS investors here -- I'm torn. (Pun intended.) I'm always intrigued by profitable companies that the market hasn't rewarded in many years, but I believe that most of the industry's long-term gains will come from further consolidation (a la the steel industry), which will help them achieve greater economies of scale and gain global reach.

What do you think? Is industry consolidation the answer for paper, or should individual companies battle it out? Voice your opinion on Motley Fool CAPS, where more than 83,000 investors are waiting to hear your stock opinions.