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.
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
, 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
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.
is listed in Canada but owns timberland in China.
Relative to the group, SNOFF has had better fortunes as the demand for all resources in China has trumped the global slump. Revenues and net income have both increased every year going back to before the company went public. It has a footprint in 10 provinces, mostly in the southeast part of the country, covering 312,000 hectares.
In addition to owning timberland it also has the means to mill and otherwise process what it harvests.
A not so pure play but still worth exploring is
in Australia. In 2007 GSPLF got 54% of its revenue from forestry with the rest coming from various crops and cattle. As lumber prices have declined, so have GTP earnings, revenue and dividend. When prices turn back up, it makes sense to expect GTP's numbers to improve as well.
If these names are a little too esoteric there is always U.S.-listed
Plum Creek Timber
PCL is the larger of the two. It has an $8 billion market cap with 8 million acres in 18 states. Despite the downturn in the industry, the stock is trading close to a record high. The stock looks expensive now, and has perhaps benefited from a flight to quality.
RYN is also near its high. It has a $3 billion market cap. The big differentiator between RYN and PCL is that of RYN's 2.6 million acres, 800,000 are in Australia and New Zealand. Like PCL, RYN is more expensive than it was a few months ago -- but is cheaper than PCL today based on price/sales, price to book, cash flow multiple and trailing P/E.
Any name from the timber space should be thought of as more of a "purpose holding." The hope should be that they offer value and diversification over long periods of time. Both PCL and RYN lagged the
badly in the mid to late 1990s -- but in this decade, PCL is up 90% plus dividends and RYN is up 120% plus dividend, while the S&P 500 is unchanged.
At the time of publication, Nusbaum was long PCL on behalf of clients, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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