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Three analysts and top management from nine sector firms examine the paper & forest products sector in this special 42-page Paper & Forest Products issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info507.htm.

TWST: How are you approaching the group today?

Mr. Berler: I am advising investors to remain overweight the paper stocks here in the first half of 2002. We have been recommending our overweighting in paper stocks going back to the fall of 2000, almost 18 months ago. Our view then and continuing through the recent period is that the combination of depressed valuations, unprecedented capacity shut-ins and sharply curtailed capital spending, together with aggressive moves by the Fed to stimulate the economy, would lead to a re-rating of the paper stocks. Historically, the paper stocks outperform the broader market when the Fed is easing and after commodity prices and profits have fallen enough to trigger capacity shut-ins. We believe the macros (i.e., interest rates, yield curve and other indicators of economic recovery) remain favorable. So while the current earnings picture is bleak for the commodity producers, and estimates may still have some downside, we think the stocks should continue to work well in anticipation of an improvement in commodity markets — which will probably begin later this year and accelerate through 2003 and 2004. We may have already seen some early signs of recovery with strong housing pulling building products prices up off of cycle lows of this past fall.

TWST: What are your favorite names in the group today?

Mr. Berler: Right now we have a collection of recommendations. Some are straightforward plays on a recovery in commodity prices and profits. Other recommendations focus as much or more on company specific drivers of value creation. We’ve been recommending Domtar (NYSE:DTC), Smurfit-Stone Container (Nasdaq:SSCC) and Abitibi-Consolidated (NYSE:ABY) as the three most attractively valued, best-positioned stocks looking out over the next six to 12 months. We also see some attractive values in the European sector. We think Sappi (NYSE:SPP) sports one of the more compelling valuations in our global universe. Sappi’s earnings and cash flow far exceeded expectations in the upcycle of 1999-2000 and have held up better in the current downcycle. SPP is engaged in a 10% share repurchase, with a view that share repurchase is the highest return use of free cash flow. Sharply higher-than-expected earnings and cash flow in 2000 enabled the company to pull its debt down comfortably within its target range for the first time since 1994. We have been quite focused on the uncoated free sheet sector. We view uncoated free sheet as the sector of the industry that probably has the best supply/demand outlook of any sector over the next six to 12 or even 18 months. That’s primarily because the producers bit the bullet and shut down close to 12% of industry capacity over the past 12-18 months. I think that should be enough to bring supply into line with demand.

TWST: As a final word, how should investors be approaching the group today? What advice would you like to leave investors with?

Mr. Berler: Let me be very blunt about this. I’ve been doing this for nearly 15 years and I’ve learned the hard way that to make money in paper stocks you have to be a true contrarian. You have to be willing to buy these stocks when visibility is at its lowest. Visibility is the buzzword that drives many stocks and many sectors in the stock market, but that’s not the case with the paper stocks. To make money in paper stocks, you have to be willing to buy these stocks when there appears to be nothing but bad news on the horizon; when the stocks are falling; when Wall Street really has nothing good to say about them; when estimates are dropping and when earnings are low and falling; and when valuations on current earnings or even on next year’s earnings are very high. So this is a group that really doesn’t fit the traditional investing model where you buy stocks when business conditions are firming, when earnings estimates are rising and when demand is strong — you typically will not make money in paper stocks when that’s the case.

This special issue includes:

1) Paper & Forest Products - In an in-depth (5,900 words) Analyst Interview, Matthew Berler, Managing Director at Morgan Stanley, examines the outlook for the sector including and shares specific stock recommendations.

2) Paper & Forest Products - In an in-depth (3,100 words) Analyst Interview, Anna E. Torma, North American Paper & Forest Products Analyst at Merrill Lynch Global Securities, examines the outlook for the sector including and shares specific stock recommendations.

3) Paper & Forest Products - In an in-depth (3,500 words) Analyst Interview, Mark Wilde, Managing Director at Deutsche Banc Alex. Brown, examines the outlook for the sector including and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of nine sector firms examine the outlook for their firm and the sector.