Why Trees Are Better Than Stocks
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by Dr.
Steve Sjuggerud April 2006 Most people don't know that timber has been the single best performing asset of the last 30 years. From 1972-2001, an investor in timber saw average annual returns of over 14.5%. In other words, if you had invested $10,000 in timber in 1972, you'd be sitting on over half a million dollars right now. That's better than stocks (where you would have made 70% less), real estate (75% less) and bonds (76% less). The journal Trusts and Estates summed it up best: "Timberland is a conservative yet high-yielding investment, an excellent choice for clients who can afford to put their money in for the long haul." The average Wall Street investor wouldn't pass up the opportunity to put money in an asset that has consistently beaten the stock market — and generated an average annual return of 14.5% for the last 30 years — and yet, so many of them do. In 2003, the Hancock Timber Resource Group estimated that only 0.3% of the entire investment universe (meaning, all the money invested in U.S. markets, like stocks, bonds, and real estate) were timber-related investments. As a point of comparison, consider that stocks and bonds comprise more than two-thirds of the total — 67.8%. The truth of the matter is that very few people enjoy some of the best long-term profits the market has to offer because very few people actually understand timber well enough to invest in it.
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that keeps growing, regardless of recessions or stock market turmoil.” For example, there are many different ways in which timber companies can produce revenues, besides just the timber itself: • Biological Growth of Trees. This is where 65% to 75% of timber returns come from. The trees are genetically engineered from superior stock, treated with specially designed herbicides and pesticides, and constantly monitored in order to increase the chances of survival and growth. Timber stands provide income at various points throughout each rotation. But it's not just the wood that makes these trees so valuable. Besides lumber and paper, forests are responsible for producing products such as adhesives, turpentine, waxes, polymers, gunpowder, rosin, medicines (such as aspirin, quinine, and digitalis) perfumes, charcoal, and fertilizer. • Raking Pine Straw. This stuff is bundled up and sold as mulch in places like Lowe's and Home Depot. In Georgia and North Carolina alone, the pine straw industry generates about $50 million annually. • Seed Collection. Evergreen trees drop pinecones. That's how they reproduce. On a tree farm, these cones are collected and sold to places like China, where the trees don't grow naturally. • Land-Use Fees. Timber companies allow outdoorsmen, such as hunters, birdwatchers, campers and hikers to access their lands for a fee. These fees contribute to the overall profitability of the company. According to a University of Georgia study, timber production income can be increased by as much as 23% through enterprises such as these last three. But there's one source of revenue that trumps all of these… In the industry, the term is "higher and better uses" — land a timber company owns that can be sold to developers and retail chains (and even environmental groups) for big bucks. I'm talking about large tracts of land near major highway interchanges (a perfect location for a McDonald's or an Exxon)… Or acres just beyond the outskirts of developing areas, like booming towns, or expanding cities (a perfect location for a strip mall). In short, timber is one of the best investments you can make right now. BUY TIMBER NOW People ask me how I come up with some of the "crazy" investment ideas I find. It works something like this… I read a ton, even though I feel like I've seen 99% of it before. And then there is a crack… a window… I get a tidbit… I find something that piques my interest… Whether it's a billion dollars of Argentine property for $180 million, free market reforms in Iceland or Israel, the elimination of the ability to print money in Ecuador, gold coins down at their lowest premiums to melt in recorded history, Harvard increasing its stake in timberland to 12% of its assets because timberland returned 13% a year since 1960, or… well, you get the idea. It smells like a big opportunity. Lately it's been timber. The more work I do, the more attractive I find timber to be... [http://www.dailywealth.com/images/20051221Timber.gif] The chart above tells you what you need to know…. Timber has had three down years in the last 45 years. Total returns on timber have beaten the stock market, with less risk. Is that even possible? Yes. It's not only possible…. It's not even that hard to explain…. Here are the rough numbers of how timberland has worked out over time: 1% Land
value increase In addition, there's cash flow from regular timber sales, and more income from additional uses of the land (hunting licenses, pine straw, and more). The investment proposition is exceptional, if there's an easy way to do it. And there is… you just buy a timber stock. Even better, it's a great deal… The company I'm talking about is the world's largest timberland REIT, Plum Creek Timber (NYSE: PCL). The story here is simple... In the course of my research, I think I've come across every major timber deal in the U.S. over the last 10 years (maybe 100 major deals). And I've found and recorded most mid-sized timber deals in the Southeastern U.S. as well. In short, I've gotten to know timberland prices. Right now, it seems fair to say that bare timberland in the Southeastern U.S. is in the $600-$700 an acre range. If the site has been prepped and planted, you can add a few hundred bucks. And if you're a couple of years in, and the weeds have been controlled and the trees are growing as they should, there are another couple hundred bucks. Mid-sized tracts with a variety of tree ages might go for $1,500 an acre or more to individual investors, and very large tracts with mixed ages for $1,200 an acre or more right now. So I find it very interesting that the stock market value of Plum Creek is $865 an acre (and the enterprise value is about $1,050 an acre). We ought to have to pay a premium to buy a quality timber manager like Plum Creek. If we bought timber on our own, we'd likely pay $1,500 or more per acre. We wouldn't be diversified. We'd have to pay for many services above and beyond the cost of the acreage to manage the thing. And our return would be hurt by our ignorance of how to efficiently run it. But instead of paying a premium for professional management, by buying Plum Creek, we're buying a diversified timber portfolio (Plum Creek owns eight million acres across 21 states) at a nice discount. Timber has been a great performing asset over the long run. But it has stalled in recent years. While every other asset has run up in value, timber hasn't. It's still attractive now. I still think we have 40% in upside potential in these stocks over the next few years. And the timber REITs are the best way for you and me to get in. Buy Plum Creek Timber (NYSE: PCL) now, to own timberland in 21 states, and collect a 4% dividend as the trees grow exponentially, year after year. Use a 25% trailing stop. But Plum Creek just wasn’t enough timber for me. So I want to tell you about one other timberland investments that I predict will beat the pants off the stock market over the next few years. I’m talking about Canada’s TimberWest, and it’s the best timberland value in North America today. Like Plum Creek, TimberWest owns so much land that if its holdings were a state in the U.S., it wouldn’t be the smallest state. Most of TimberWest’s holdings are on picturesque Vancouver Island, Canada. In fact, the company owns 11% of the island. Most of those holdings are in the southern portion of the island — right where you want to be. The city of Vancouver is a short hop across the water to the east, and Washington state’s famed Olympic Peninsula is a short trip across the water to the south. This is prime tree-growing country. Trees need rainfall and sunlight. The days are long in the summer, providing the sunlight. And the rainfall, as Seattle residents can attest, is plentiful. With these ingredients, you might be surprised to learn that trees in the Pacific Northwest actually average 8%-10% growth per year, versus 5%-7% growth in the Southeastern United States. This growth is exceptional... in Scandinavia or Russia, where timberlands are plentiful, trees may grow at 1%-2% a year. This is the good stuff. A value of $1,850 an acre is a very conservative guess for timberland values in Oregon and Washington, based on large timberland deals there in recent years. Yet, based on its current stock market price, TimberWest is valued at $1,250 an acre. This seems awfully low... Plum Creek is priced at $1,125 an acre, but much of its timberland is in less productive areas (for example, Maine, Montana, and Wisconsin make up over a third of Plum Creek’s timberlands, and these are not known as high-value areas.) TimberWest owns the good stuff. High quality woods... high-value woods... and that’s exactly what Asian buyers want. (More on Asia in a minute.) Even better, TimberWest is ideally situated to pick up some large real estate sales as well. The land it owns is simply gorgeous. The area around Vancouver Island may be my favorite place to be on the planet in the month of August. (Last August, I went for a swim out to a channel marker and back in the bay in Vancouver with Bob Bishop, editor of the Gold Mining Stock Report. The water was probably 70 degrees. The air was 75 degrees, without a cloud in the sky.) The Vancouver/Victoria area is hot. And TimberWest is well positioned to capitalize on the growth. TimberWest already has about 15,000 acres earmarked for real estate sales. You can bet these sales will go for much higher than $1,850 an acre. Just think... if they could sell those acres at $10,000 each, that’d be $150 million in sales right there. Yet the market value for TimberWest is under U.S.$900 million. By buying in now, you get 825,000 acres of timberland. Of that, there may be as much as $150 million in land sales hidden in there. And you get a rock solid 8% dividend... a dividend that will remain at $1.08 per year ($0.27 per quarter) quite possibly for the rest of your life. This dividend is something to talk about... The company recognizes that its shareholders appreciate a stable dividend payment. The company has paid $1.08 a share per year (or more specifically, $0.27 per quarter) since 1998. And by charter, it plans to pay $1.08 dividend per share per year until the year 2038, at least. Since the beginning of 2003, shares of Plum Creek are up over 70%, but shares of TimberWest are up only 10% (in Canadian dollars). TimberWest, hiding up in Canada, has been ignored. It’s time to buy. There are a few potential catalysts that could pop the stock up a quick 10%-15% as well... The biggest one is something called “Notice 102.” This is an absolutely silly 100-year-old law from Canada’s federal government. It is a restriction that applies only to landowners in British Columbia. It states that a private landowner can only export logs if there is no buyer in British Columbia. Private forest landowners in all other Canadian provinces are free to sell their logs to any customer they choose. According to TimberWest documents, “During 2004, TimberWest sold 1.2 million cubic meters of logs into markets in Asia and the U.S. West Coast at an average sales price premium of $33 per cubic meters over domestic sales prices. The price premium earned by selling private land logs into the export market represents more than half the distributable cash generated by the Company’s timberland operations...” TimberWest has legal proceedings against the federal government seeking the repeal of this “discriminatory legislation.” It expects this case to go to Federal Court “in the last half of 2005,” so any day now. In my opinion, if TimberWest wins this, it would be a huge victory. In 2004, a full 39% of TimberWest’s sales went to Asia, where TimberWest really makes its money. But 47% of its sales stayed in Canada, thanks to Notice 102. If Notice 102 goes away, TimberWest can be significantly more profitable. Its land values would go up and its share price would go up as well. I could go on. There are many issues that I could bring up (visit the website www.timberwest.com, it’s very good). But the company is pretty simple. They own valuable land. And they cut logs and sell them. That’s it. These days, they don’t spend much money on machinery or people, choosing to outsource all the work. It’s a simple business, at its core. Jeremy Grantham hit it out of the park in 2000, saying sell stocks and buy real estate. In late 2005, he said timber will be the best performing asset for the next seven years. You should listen. By buying TimberWest now, you’ll get an 8% annual dividend with the potential for increase in the share price as things like Notice 102 are resolved. It should be a great low-risk winner for the next several years. Buy TimberWest now (symbol on the Toronto Exchange TWF.UN, symbol at Schwab: TWTUF) and own 825,000 acres of fantastic Vancouver Island for $1,250 an acre. Collect $1.08 a year (in Canadian dollars) in dividends for the rest of your life. Please note that, this is a relatively small stock at U.S.$900 million in market cap. So please don’t chase the stock higher. Remember that you’re buying trees. Trees shouldn’t get 25% more valuable overnight. You don’t need to own your entire position right away. If the price spikes up a bit, don’t worry, just remember, these are trees. The only reason it could spike is if all readers try to get in with a full position at the open on Monday. Please don’t do that! Lastly, with TimberWest’s relatively low market cap, please don’t enter a trailing stop order in the market with this stock, ever. |