Get Paid to Wait for a Housing Bottom

01/18/2012 4:47 pm EST

Focus: REITS

Jim Jubak

Founder and Editor,

The real-estate market is showing signs of turning, and this REIT will pick up nicely when it does, but in the meantime you’ll get a solid, predictable income stream, writes MoneyShow’s Jim Jubak, who can also be found at Jubak’s Picks.

I added Weyerhaeuser (WY) to my Jubak Picks 50 long-term portfolio on Friday, January 13. (See my post from last week for all the changes to the portfolio.)

Why? Because as much as I’d hate to pick a precise month for the bottom in the real-estate market, I think that we’re close enough to a bottom. So, I’m willing to put some money to work in the sector—if I get paid to wait for the precise turn.

Weyerhaeuser converted to a real estate investment trust in 2010 (with a 2.97% current dividend) so I’m getting paid a better than 10-year Treasury bond yield while I wait for a bottom in the second half of 2012 or sometime in 2013. And when the bottom comes, Weyerhaeuser’s real-estate sales on its 6.15 million acres of timberland and its concentration on products for the construction market give me plenty of leverage to the upside.

About 40% of sales come from its wood-products business, with about 70% of the products of that unit used in new residential construction. Weyerhaeuser Real Estate Company (15% of sales) develops master communities, single-family houses, and residential lots.

With that business mix, as you’d expect, 2011 wasn’t the greatest year for Weyerhaeuser. The company is on track to earn 43 cents for the year (Weyerhaeuser reports fourth-quarter earnings on February 3). That’s quite a come down from the $1.44 a share the company earned in 2006, but it’s quite a bit better than the $2.58 a share loss in 2010, or the $8.61 loss in 2008.

Weyerhaeuser does have one gem of a business that has kept on pulling in revenue and profits even while real estate and wood products have tumbled. The company’s cellulose fibers business (30% of sales), which produces absorbent pulp used in diapers and specialty pulp used in textiles, showed a 28% EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in 2010.

Pricing—and therefore margins—in that business are likely to stay strong in 2012, Standard & Poor’s projects.

I think the stock is fairly valued in the short-term at roughly $20 a share, which is why I’m putting this in a long-term portfolio. The upside here will come from a recovery in the US housing sector.

Buy and hold—and collect that dividend—is an appropriate description of these shares.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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