Saturday, July 15, 2006


Seeing the forest for the trees

The market seems to have embraced the old axiom "sell in may and go away". But the fact remains that its a great time for finding valuable gems in these rough times. Lets start with a Trivia question : Name an investment class that has beaten the stock market consistently over the long term? a hint: the Harvard and Yale endowments invest hundreds of millions of dollars in this investment. The answer "Timber"

So is timber really that good of an investment and how can you and me own the asset without the hassles of cutting down trees and hauling lumber to the yard?

Firstly timber as an asset class that has beaten the stock market consistently. From 1973-2002, managed timber returned roughly 15% annually as an investment, while stocks returned about 11%. Timber like most commodities is uncorrelated to stocks. Trees don't know about the rising oil prices or interest rate hikes. And ever more imprortant in today's rising inflationary environment, the price of timber has consistently beaten inflation. We should think of a timber investment as a good inflation hedge. According to legendary investor Jeremy Grantham, over the last century, timber prices have risen at 3.3% above the rate of inflation. Add 5% a year in income, and you've got a timber investment asset that has returned double digits, competing with stocks over the long run.

Large endowments and funds have the luxury of owning timberlands or holding options on the timber output on acres of forests. Large corporations like International Paper and Wayerhauser own timberlands that they use as raw materials in paper manufacture and sell timber in the open market but there are two companies that stand out in this area Plum Creek Timber (NYSE:PCL) and Rayonier (NYSE:RYN)

Plum Creek Timber (NYSE:PCL) ($34) is a Real Estate Investment Trust (REIT) and the largest private landowner in the United States. They have about eight million acres of timberland under management. The company produces lumber, plywood and fiberboard at ten facilities in the Northwest. It has a $6.5B market cap and pays a dividend of 4.5%. Currently PCL has set an aggresive $400M share buyback plan and as a REIT enjoys all the favorable tax advantages. A more attractive company on a fundamental and technical basis is Rayonier (NYSE:RYN) ($36.8) also a REIT a slightly smaller one. RYN has about 2.4M acres under timberland in the United States, Australia and New Zeland. It also has the added benefit of a diversified a performance fiber unit, these fibers are used in tires, rayon yarns, paints, ink and even diapers. RYN had a great run this year hitting $47.50 but is down almost 20% at $36.85 and yields a attractive 5%.

On a technical basis both the stocks have broken down (blame the housing slowdown) and are likely to go down south even further. Reasons as follows:
- timber is a key material in housing construction.
- these companies have in the past sold land at high prices for housing development
- the resolution of the US-Canadian timber dispute is making Canadian timber competitive again

However it may be a good time to watch these two since both these companies are long term keepers for the follwoing reasons:
-high income yielding companies
-owning a tangible asset "timber"
-inflation hedge

I think an attractive entry point may be at the stocks 52 week lows PCL ($33.60) and RYN ($34), only if you want to hold on to these for 5 years or longer.

5 Comments:

Anonymous Anonymous said...

wondering if my email address shows up if I post as "anonymous" - before I make comments...

8:22 PM  
Anonymous Anonymous said...

You mention that Rayonier is "a fundamentally more attractive company". Too true. The other Company mentioned has a CEO that is married but sleeping with a V.P. of the same said Company,(the entire Comapny knows this) and another V.P. that is divorced...for various reasons...and takes his 9 and 12 year old children to Vegas for "vacation". Two other V.P.'s have quit recently and the CEO wonders why there is not more loyalty to The Company.Company's are not entities unto themselves. People work for people, not a Company and if the People are untrustworthy or lack integrity, the same carries over to the Company as a whole. My advice? SELL, SELL, SELL.

8:33 PM  
Blogger Empty Spaces Inc. said...

interesting post. have you invested in either of them?

have you checked out twtfuf [timberwest .com], a canadian timber company?

how about a link exchange?

12:37 PM  
Anonymous Anonymous said...

www.channelfinancing.com

6:49 AM  
Anonymous Anonymous said...

www.channelfinancing.com

6:50 AM  

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