Investing In The Woods

By Matthew McCall | February 15, 2010 AAA

In early February the stock market was trading off its recent highs. Gold had pulled back substantially, and most other commodities were taking a hit as the U.S. dollar rose. However, one commodity has been able to shrug off the selling and hit a fresh two-year high in February - timber.
Price Of Lumber Highest Since 2007
The price of timber rose above $280 per 1,000 board feet in February, the highest since August 2007. And in the last year, the commodity is up approximately 60%, slightly ahead of U.S. equities. The rise in lumber is confusing to many because the housing market has yet to show sustainable recovery signs. Considering the housing sector is responsible for 45% of the lumber demand, according to the Western Wood Products Association, the rise in timber can suggest a few things.

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For starters, the rise in timber could be a leading indicator that the housing market is about to turn, as the commodity's price rises before the next demand surge. On the other hand, the price increase could be tied to the fact that timber supply has dropped dramatically, as less was produced during the recession. Finally, it could be that lumber is rising with every other commodity and asset class off the March lows after investors priced in a depression scenario that never occurred. (For more, check out Timber Investments Cut Down Portfolio Risk.)

Positioning Your Portfolio With Timber
Ways to play the rise in timber range from buying the companies that produce the lumber to the homebuilders that could be set to rally according to the rise in the commodity. Even home improvement stores that supply the lumber would benefit from increased demand.

Claymore/Beacon Global Timber ETF (NYSE: CUT)
This ETF consists of a basket of stocks headquartered around the globe, with the U.S. taking a 39% allocation. The ETF had a strong 2009, gaining 51%, easily beating the S&P 500. Of the ETF's top 10 holdings, Rayonier (NYSE: RYN) is one U.S. name that jumps out as a possible beneficiary of rising timber prices. The company operates as a real estate investment trust (REIT) based on its tax status and the 2.5 million acres of timberland it owns around the globe. The stock currently trades at an acceptable P/E ratio of 10.5, less than half of its competitor Plum Creek Timber REIT (NYSE: PCL). If you want to explore more options, an alternative to CUT is the iShares S&P Global Timber & Forestry ETF (Nasdaq: WOOD). (For more, see Commodities That Move The Markets.)

DR Horton (NYSE: DHI)
If you believe the rise in timber prices indicates that the U.S. housing market is about to pick up, the play would be in the home builders sector. One of my favorites is DHI, which reported its first quarterly profit in early February, the first time the company has made money since 2007. This could be another sign the landscape in the housing market is improving.

Lumber Liquidators (NYSE: LL)
A secondary play on the housing market would be the lumber supplies and home improvement stores. LL supplies hardware floors, which will likely be installed if new homes are built. Hardwood floors are the trend for new construction building and remodels. Two major questions make this stock very risky: 1) Will the housing market improve? and 2) Will the economy help the remodel business?

Getting Down To The Root
It really depends on what driver you attribute to the rise in timber prices. If you feel the housing market is the main driver, then it's clear you should look at buying DHI. If you want to go to the heart of the matter, then CUT or any stocks in the timber REIT sector are options. For investors who are positive on the housing market and economy, there is the high-risk LL play. There is something for everyone.

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