COLUMN-Housing rebound boosts timber stocks

Mon Jun 3, 2013 4:39pm EDT
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By John Wasik

CHICAGO, June 3 (Reuters) - If a tree falls in the forest, can you make a little money? As the U.S. housing rebound continues, you can watch the value of your real estate rise. In addition you can reap gains from resource companies that own and process timber.

Since most U.S. homes are still framed with wood, timber becomes a more valuable commodity as new construction booms. Home prices gained the most in seven years in March, according to a recent S&P Case-Shiller housing index report. Housing starts in April rose 16 percent over the previous month with new building permits up 14 percent, according to the U.S. Census Bureau.

North American sawmills are running at the fastest pace in six years, up nearly 7 percent over last year, according to CIBC World Markets, a Canada-based investment bank. Growth in China is also contributing to the rebound. More than 60 percent of log exports from the Pacific Northwest head to the People's Republic.

Timber is also becoming more scarce as forests shrink. As a commodity, it provides an inflation hedge, too; the S&P Global Timber & Forestry index has produced an annualized return of nearly 7 percent over the past three years through April 30. The current Consumer Price Index is running at an average 1 percent.

Why invest in timber and related resource companies instead of the obvious play in homebuilder stocks? Those companies have been rallying for more than a year and are pricey.

The SPDR S&P Homebuilders ETF, for example, a fund that holds most of the major home-construction companies, is up more than 50 percent over the past year through Friday, almost double the price of a consumer cyclical index. That portfolio's price-earnings ratio - what investors are willing to pay for a dollar of expected earnings - is 20, compared to 14.4, for the SP 500.

The underlying S&P index for the timber sector has climbed more than 31 percent over the past year through May 31 compared to a nearly 50-percent gain for the S&P Homebuilders Index. The iShares Global Timber and Forestry Index ETF (WOOD), has p/e of 18; that's not a bargain price either, but timber stocks are a better value now relative to homebuilding stocks and may have more upside.   Continued...