(MONEY Magazine) – ANY DAY NOW I EXPECT $20 BILLION (ANNUAL sales) International Paper, the world's No. 1 paper producer, to complete its $3.5 billion purchase of $1.9 billion Federal Paper Board at $55 a share. That's 50% more than the $36 a share FBO fetched before IP came courting in November. (See page 36 for merger-related news on two of my previous picks, $58 million Box Energy and $1.3 billion CUC International.) FBO's attraction? It derives 65% of sales from modern, mostly southern pulp and paper mills fed by 690,000 acres of timberland. In October the market price of pulp, the main commodity of papermaking, hit nearly $1,000 a ton, up a record-setting 30% from early 1995. So IP figured it could obtain additional pulp/paper capacity much more quickly and cheaper by scooping up FBO on Wall Street than by building its own plants from scratch.

I'm convinced that starting this year that same consolidation rationale will help rekindle investors' interest in some dowdy lumber companies. Over the past 12 months the Dow surged 38%. In contrast, such forest-products stocks slipped an average of 2%, greased by a storm-dampened 7% drop in housing starts and a 14% price decline for framing lumber such as two-by-fours. This year and next, however, my housing industry sources see a robust 3% to 4% annual recovery in home building sustained by mortgage rates that won't rise much above today's low 7.5% average, vs. about 9% a year earlier. In response, they expect overall lumber prices to jump 8% to 15% in 1996-97.

My favorite way to ride this projected upturn is $2.8 billion Louisiana Pacific (ticker symbol: LPX), an often overlooked sapling among such sequoia as $14 billion Georgia Pacific and $12 billion Weyerhaeuser. The grossly undervalued stock of LPX, based in Portland, Ore., trades on the New York Stock Exchange at $24 and yields 2.3%. My investing sources estimate that its 114 mills and 1.6 million acres of timberland (a third of it rich in choice California redwoods) are worth upwards of $40 a share. Today's $24 stock reflects only about 60% of LPX's ever-increasing value. I figure that sooner or later the disparity will catch the eye of larger rivals scrambling to add capacity in an industry turnaround like the one I envision this year.

But say I'm wrong. Where might LPX trade on its own in a year or so? I put the question to several value-minded money managers who've lately been big buyers. One is John Maack of Portland's Crabbe Huson Group, with $4.2 billion under its control. "We're aiming for at least $33, or 38% more," says Maack, who's forecasting earnings gains of 19% in '96 and 32% in '97. "Our target is closer to $40," or up to 67% higher, adds Arvind Sachdeva of $4 billion Dean Investment Associates in Dayton.

Even if the bulls are wrong, I don't see much risk in a stock whose price has been hammered down 50% from its '94 peak of $48. One culprit was a barrage of lawsuits that last year triggered the firing of longtime chairman Harry Merlo and a $345 million write-off for settling consumers' claims. The suits focused on low-cost clapboard siding LPX made from a plywood alternative called oriented strand board (OSB). Plaintiffs claimed the siding was prone to rot quickly in humid climates--a problem LPX says has been fixed. Here's what I've learned:

Investors dwell unduly on siding suits. That's the view of Paine Webber's Steve Spence, the Portland broker whose market-beating stock picks have earned him a slot on Money's All Star team for the past six years. "The $345 million should amply cover LPX's siding liability," he says. "And OSB's main use as home sheathing will continue to grab share from pricier plywood." The firm is a leading maker of OSB, whose slice of the so-called structural panel market has nearly doubled from 21% to 39% since '90. Plywood's share has shrunk from 79% to 61%. OSB is also more environmentally correct in that it's made from chips of scrawny trash trees, while plywood is peeled from larger, older logs.

Suwyn's solution could be to sell. I asked Spence a question that puzzles me and probably bedevils LPX's new chairman, Mark Suwyn, a former International Paper executive vice president hired in January. How can you restore LPX's credibility with thousands of builders who were burned by the faulty siding? "The quickest solution would be to sell the company to a Georgia Pacific or Weyerhaeuser," says Spence. "By assuming the acquirer's good name, you effectively erase that ill will overnight." Suwyn might end up unemployed--but not out of luck. His undisclosed compensation package is reportedly laden with LPX shares and stock options.