Timber Sector Begins to Show Promise

Timber and lumber have drawn a lot of attention in the last few years, as legendary investors like Jack Meyer and Julian Robertson extolled the virtues of diversifying an equity portfolio with timberland.

But the sector has only recently been living up to some of the expectations.

Lumber prices have been in a bear market of late, as indicated by the chart, and that the correlation to equities at times is quite low.

Despite the big bounce of late, the International Wood Markets Group says the next bull market is still two years away, but when it comes, it will be record-setting.

Click here for larger image.

Given that backdrop, the charts for most of these stocks look lousy. Buying anything in this space is betting on a turn in the cycle, and at some point it will turn, which should benefit this group.

Last fall Claymore launched its Clear Global Timber ETF(CUT Quote - Cramer on CUT - Stock Picks), which owns companies related to the timber industry but it also includes paper companies and other names that are not quite pure plays.

For investors willing to look outside the U.S., and perhaps do a little more homework, there are several purer plays that could be better proxies for timber in the future.

TimberWest Forest Units(TWTUF Quote - Cramer on TWTUF - Stock Picks) is a stapled unit (a high yielding structure whereby most of the income flows to shareholders) that owns 322,000 hectares (one hectare equals 2.47 acres) in British Columbia and also has milling operations.

TimberWest had a rough 2007, as prices and demand went down and its costs went up (think energy expenses). Like many Canadian income vehicles, the strong Canadian dollar in 2007 also hurt the results.

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