Follow Peter Lynch's Advice With This Soaring Stock

Sometimes the profound truths are the easiest to understand. 

This is particularly true when it comes to investing. Many investors make the process much more difficult than it needs to be. At its core, investing is a simple process governed by a few irrefutable axioms. 

Choosing investments based on what you already know is one of these simple yet profound truths. I first heard this rule articulated by Peter Lynch, the superstar manager of Fidelity's Magellan Fund. Lynch wrote one of the best books on the stock market, "One Up On Wall Street," in which he stresses this simple investing rule.

 

Leading commodity trader Jim Rogers also repeats this mantra whenever he is asked what to invest in. I learned this several years ago when I interviewed Rogers while he was running on a treadmill -- an interviewing first for me -- in his home gym. When I asked if he cared to share any investing tips, he replied, "Look around you -- what do you see?" 

I saw racks of dumbbells and a pitcher of orange juice, among many other things. I must have had a perplexed look on my face because he said, "Invest in items you use every day, because if you use them, it is very likely everyone else does." 

I was hoping for specific tips to pass along, so I was disappointed he wasn't willing to share any insider-type information -- but after further consideration, his suggestion struck me as profound. I remembered it was the same advice Lynch offered in his best-selling book.

Since then, I have integrated this idea into my investment choices. Recently, I took an extreme look at the concept. Drilling down, I asked myself: What single item do I and nearly everyone else on the planet use on a daily basis? 

My first and obvious answers were air and water. Aside from a few niche hedge fund making a market in water rights and the water company utilities, there wasn't much exciting news there. No one has figured out how to commoditize the air we breathe, so that option hit the skids, too. 

Finally, I thought of toilet paper as being the single item used by most everyone on a daily basis. Everyone from the wealthiest people in the world to the most downtrodden use this product at least once per day. The average person uses 20,805 sheets of toilet paper a year, according to online retailer ToiletPaperWorld.com.

My next step was to locate stocks in this industry. One company stood out above the rest as a top performer with plenty of upside. That company is Orchids Paper Products Co. (NYSE: TIS).

	© 2013 Orchids Paper Products
	Orchids Paper markets directly to consumers under a variety of names, such as Colortex bathroom tissue.

Founded in 1976, Orchids Paper's product line consists of bathroom tissue, paper towels and paper napkins. The company markets directly to consumers under a variety of names through assorted types of stores. It also sells "parent rolls" wholesale to firms that label and market under their own brand names.

Orchids boasts a market cap of just over $216 million, annual revenue of nearly $101 million and gross profit of $22.6 million. Shares of TIS have risen 55% over the past 52 weeks, which compares with the S&P 500's gain of just less than 16%. Orchids' other appealing metrics include the more than 28% of outstanding shares held by insiders, and the forward annual dividend yield isn't shabby at 5%.

The company reported record net sales of $29 million in the second quarter, and earnings before interest, taxes, depreciation and amortization (EBITDA) climbed 27% to over $6 million. Guidance was solid, with CEO Robert Snyder estimating that converted product shipments in the second half of 2013 would be at an annualized run rate of between 8.6 million and 9.1 million cases.

What really attracted me to this company is the technical picture. Shares have been in a solid uptrend since April 15. The stock has recently hit resistance in the $28 area and is building a base.

Risks to Consider: This company certainly fits the "buy what you know" axiom. However, like all other stock investments, it is not without risk. Always be certain to diversify and use stop-losses when investing.

Action to Take --> I love this stock on a breakout close above $28. My nine-month target price is $33, and the initial stop level should be just below $26.

P.S. -- With its 5% forward yield, a stock like Orchids Paper is perfect for what we call a "Dividend Trifecta" strategy. Simply put, it's a three-part approach to dividends that multiplies the effectiveness of every dollar you invest. Click here to learn more...