Weyerhaeuser Close to the Buy Zone

05/22/2012 4:56 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The stock should enjoy a nice turnaround as the housing glacier melts, but the smart money says to wait for another pullback, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

One more dip should do it.

I’m putting Weyerhaeuser (WY) on my watch list today, May 22. I already added the stock to my Jubak Picks 50 long-term portfolio back on January 13, because in the long-term I think it’s a good way to profit from the eventual recovery of the US housing sector.

Since then, the shares have done just about nothing—they’re down 2.7% as of 3 p.m. on May 22. But the stock pays a 3.1% dividend, so from a long-term perspective, I’m willing to wait for the turn.

But from the shorter-term, 12- to 18-month perspective of my Jubak’s Picks portfolio, I’d sure like to buy closer to the turn in the sector. Today’s numbers on existing home sales say that turn continues to approach—although it’s not quite here yet.

If tomorrow’s numbers on new home sales confirm this trend, I’ll be looking to buy on the next dip toward the stock’s 200-day moving average of $18.43. That’s roughly 6% from today’s price. It’s not a huge amount, but I’m looking not just to reduce my purchase price, but also to shorten the period between buying and profiting for this shorter-term portfolio.

The data released this morning show a continued recovery in existing home sales to an annual rate of 4.62 million in April, from 4.47 million in March. Economists surveyed by Briefing.com had expected sales to increase to a 4.65 million annual rate.

Although the data was positive, digging down a level raised a worry or two. Distressed sales—you know, the sales of properties in foreclosure (or pre-foreclosure)—fell to just 28% of sales in April. That’s a slight dip from the 29% of sales represented by distressed sales in March, and a big drop from the 34% in February and the 37% in April 2011.

What seems to be happening is that banks are holding these properties off the market in the hope of getting a better price in the not so distant future. That hope is one reason to think that the housing turn is approaching.

However, it also suggests that the so-called shadow inventory, foreclosed properties that banks want to sell but aren’t yet officially for sale, is rising. That means that the 10.1% year-over-year increase in the median home price in April is likely to be reversed when banks finally decide to sell.

This timing is extremely important to Weyerhaeuser, since through a series of divestitures the company has turned itself into a concentrated play on timber, wood products, and real estate.

New home construction—the sector where Weyerhaeuser has its current concentration—is sensitive to competition from both existing home prices and the inventory of existing homes. I think the recovery in the housing market is likely to be relatively modest this year, and that is likely to lead to only modest increases in the demand for and the price of lumber.

I get a 12-month target price of $23 for these shares. From today’s price of $19.54, that would be a 17.7% gain. From the $18.43 200-day moving average, the gain would be 24.8%. The higher gain is more commensurate with current market risk, which is why I’ll wait for the dip.

One more note: Weyerhaeuser has converted to a REIT (real estate investment trust), so that as cash flows rise, so will dividend payouts. I think that’s a prospect for 2013, however, and not 2012.

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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