Timber Trust a Defensive Gem

05/26/2011 9:22 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Timber harvester Rayonier has stood tall in the correction, raising forecasts and setting new highs, writes Nicholas Vardy in the Bull Market Alert.

Sharp sell-offs like the one we’ve just been through can be psychologically tough, but they are part and parcel of the investment game.

Recall that last year, emerging markets sold off by close to 17% in January and another 13% in May. Yet the worst decision then was to exit the market en masse.

The best strategy is to keep your cool and limit your investing to the defensive sectors in the market. Timber is one.

Legendary value investor Jeremy Grantham argues that timber is the only low-risk, high-return asset there is. After all, it has risen steadily in price for 200 years, and has returned an average of 6.5% a year for the last century. It also holds up better than almost any asset class during unrelated sell-offs in the market.

My favorite way to play timber is through Jacksonville, Fla.-based Rayonier (RYN). Rayonier is one of the biggest players in the US timber sector—owning, leasing, or managing approximately 2.5 million acres of timberland and real estate, mostly in Georgia, Florida, and Alabama. The company also has a joint venture for 350,000 acres in New Zealand, and manages another 100,000 acres in Australia.

Rayonier recently reported first-quarter net income of $58 million, or 70 cents per share, compared with $57 million, or 71 cents per share, in the year-ago period. The company's cash situation is much more impressive, with cash provided by operating activities hitting $116 million, compared with $91 million in the first quarter of 2010.

The company recently increased its 2011 guidance, and now expects earnings of $2.85 to $3.10 per share, an increase from previous guidance of $2.50 to $2.70 per share.

Rayonier is also a real estate investment trust (REIT) for federal income-tax purposes, and thus is not subject to federal income tax on REIT income that it distributes to its shareholders.

On that front, the company expects cash available for distribution to hit $285 million to $310 million this year—an increase from the $260 million to $280 million previously estimated. It currently yields about 3.3%.

Technically, the stock broke out to the upside in late April. More importantly, even as most commodities sold off recently, the stock has held up well. [It did slip 4% from its record high in the last week—Editor.]

Buy Rayonier at market and place your stop at $59. [Shares closed at $64.25 Wednesday—Editor.]

If you want to play options, I recommend November $70 calls. Be advised, though, that these options are quite illiquid.

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