Forest Favorites

07/09/2004 12:00 am EST


Lawrence Edelson

Editor, Real Wealth Report

Two leading advisors see opportunity in timber. Larry Edelson, in The Safe Money Report, calls timber, "living gold" and suggests Plum Creek Timber. Price Headley, of, also likes the sector and recommends Rayonier.

"We see an opportunity in ‘living gold’," says Larry Edelson, in The Safe Money Report. "Plum Creek Timber (PCL NYSE) is the second largest private owner of timberland in the country with eight million acres spread over 21 states. It also owns and operates ten manufacturing facilities to convert its own logs into lumber, plywood, and fiberboard. My view: If oil is black gold, timber is living gold — an excellent storehouse of value and a good hedge against inflation. Indeed, over the last 40 years, it has outperformed both inflation and stocks, delivering an average 13% return. Every few years, geologists uncover a new gold mine or a new lake of oil or a natural gas field. Timber is different — you don't have to worry about undiscovered forests.

"Plum Creek seeks to win two ways. When lumber prices are strong, it embarks on an aggressive cutting program to cash in. When prices are low, it scales back and simply lets the trees grow, waiting for prices to rebound. Trees are a unique investment. One 10-inch tree is worth much more than two 5-inch trees. The reason is that older, larger trees can be converted into high-margin products, like lumber and plywood. Younger trees are mainly used for less profitable fiberboard. Plus, unlike bullion or oil in the ground, this inflation-hedge pays a handsome dividend while you wait — $1.40 per year, or more than a 4% yield. Buy below $33."

"As our way of circumventing any bearish inflationary pressures, we want to take at least a small stake in the basic materials sector," says Price Headley, editor of . "The forestry and wood products industries surprisingly provide some of the best opportunities in this sector right now, primarily because they’ve been lagging behind the rest of the market. During the second quarter of 2004, the S&P 500 gained 1.2%, while the forestry stocks gave up 4.6%. Under normal circumstances you wouldn’t want to buy into a falling industry, but we’re not under normal circumstances. Inflation – albeit controlled – is a reality now. We expect sustained inflation to allow all the materials companies to have greater pricing power, including the forestry companies. The fact that this group has underperformed in the last three months just means they’re better bargains.

"Among the stocks in the forestry and wood products arena, Rayonier (RYN NYSE) is among the crème of the crop. The P/E of 18.9 makes this stock cheap in comparison to the average P/E of 24.1. The reason shares are relatively out of favor is that the snapshot of the company’s fundamentals doesn’t necessarily look all that great. Based on the last twelve months, both revenues and earnings are still shrinking. But in the last two quarters, Rayonier has turned an important corner. On a quarterly basis, we’re seeing revenues creep higher while expenses are drifting lower. In fact, Rayonier recently announced that second quarter results would easily exceed original forecasts. It makes us wonder if Wall Street’s full-year forecasts were also too conservative. If Rayonier starts a series of these upside earnings surprises, this stock could wind up trouncing the majority of Wall Street’s modest price targets."

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