Generally, an investment strategy that focuses the total average annual return on equity over longer time periods tends to avoid an evaluation of companies that are about to or that have recently reported quarterly earnings. But there are exceptions, and International Paper (NYSE: IP) is one.

International Paper Friday reported unspectacular Q3 EPS of 57 cents compared to the Reuters consensus estimate of 57 cents. IP also reported Q3 revenue of $5.54 billion versus the Reuters consensus estimate of $5.36 billion. In other words, IP's performance barely met the Wall Street's expectations, and the Street was not overjoyed, with IP's shares declining 68 cents to $35.39 in Friday afternoon trading.

Still, the IP investment thesis remains largely intact. A restructuring has re-aligned its product mix and cut costs, while balance sheet improvements mean the company can more-quickly make investments in faster-growth regions. Further, while domestic free sheet (used in copiers, envelopes, forms) and linerboard (used in corrugated boxes) demand is expected to remain soft in 2008, international demand should grow at an acceptable rate.

Another major positive: IP's economies of scale. When sluggish sector conditions look immediately ahead, the Street's recent stance has been to ignore a company's size; but size matters. When the U.S. paper/paper product sector rebounds, IP will be able ramp-up on a low-cost-per-unit basis. That has little value in the Street's current-quarter mindset, which helps explain IP's very low p/e of 6. Still, interpret that low p/e as lowering your risk/return ratio.

There is an old joke on Wall Street that goes, "Trading around $35 with a p/e of 6, how much downside can there possibly be? Yes, we know: $35." It will snow in Miami, Florida before that total drop happens.

The First Call mean rating for IP is: Buy. [15 firms.] Mean 2007 target: $40.90. [high: $45, low: $34.]

Stock Analysis: International Paper is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from IP's shares. Sell / Stop Loss: $27.