Weyerhaeuser and 9 other hot stocks

Weyerhaeuser's (WY) big bet on the housing market is starting to pay off.

Bowing to pressure from Wall Street to boost its languid shares, the company in recent years sold half of its assets -- most notably its paper and packaging mills -- and reorganized itself as a real estate investment trust (REIT), a move that gave Weyerhaeuser tax advantages and required it to pass along nearly all of its earnings to shareholders.

Left after the divestitures were primarily businesses tied to the housing market, including more than 20 million acres of North American timberland, as well as subsidiaries engaged in building homes and manufacturing housing products. It also kept its cellulose fiber business, which produces absorbent pulp for diapers and packaging for such things as milk cartons.

Weyerhaeuser's wager on housing coincided with a severe downturn in the economy that was precipitated when the housing bubble burst.

Weyerhaeuser appears on a daily list created using StockScouter, an MSN Money tool that identifies stocks with strong growth prospects in the near term. All stocks with Scouter ratings of 8, 9 or 10 are considered for the list, which is then shortened to exclude those with a trading volume of less than 50,000 shares a day. The remaining stocks are ranked on the basis of market capitalization, sector membership and whether they are growth or value stocks.

In becoming a REIT, in 2010, Weyerhaeuser was following in the footsteps of Seattle-based Plum Creek Timber (PCL), which 11 years earlier became the first timberland owner to convert to a real estate investment trust. In subsequent years, other prominent forest-products companies, including Rayonier (RYN) and Potlatch (PCH), followed suit.

In making the conversion, the companies turned away from their longstanding preoccupation with felling trees and milling the logs into lumber and began harvesting tax advantages for investors instead. Forest land was increasingly seen as a financial, rather than an industrial, asset.

REITs have scant taxable income, channeling 90% of their earnings to shareholders -- who are taxed on the dividend income as individuals, thereby avoiding the "double taxation" on most corporate profits and dividend income.

Converting to a REIT opened Weyerhaeuser to a different class of investor: institutions and others seeking steady income through dividends as well as exposure to commercial real estate or mortgage financing.

Weyerhaeuser last month raised its quarterly dividend by 18%, citing "stronger market fundamentals" as well as improved operating results. First-quarter profits more than tripled on the strengthening housing market. The stock has a dividend yield of 2.5%.

Of the 15 analysts covering the company, three have "strong buy" ratings on the stock, seven have "hold recommendations, two rate it a "moderate sell" and three have "strong sell" recommendations.

Weyerhaeuser has a StockScouter rating of 9, meaning the stock is expected to significantly outperform the market over the next six months with less than average risk.

StockScouter beats the market

Here at MSN Money, we think our StockScouter rating system is about as good as it gets when you're trying to decide where to invest. StockScouter looks for stocks whose business fundamentals, price behavior, valuation and stock-ownership characteristics appear to predict a rising price in the future, based on how those factors have influenced stock prices in the past.

The system assigns each stock an expected six-month return and balances that return against the stock's expected volatility. Scouter rates stocks on a scale of 1 to 10, and ratings can change daily. Ratings and data in the chart above were current as of this article's publication date.

In addition to the daily top 10 list described above, StockScouter is used by investment research firm Verus Analytics (previously known as the quantitative business unit of Gradient Analytics) to generate a monthly benchmark portfolio of stocks that, refreshed monthly, has outperformed the market since its inception in August 2001.

An investor who began in 2001 by investing in each of the benchmark portfolio's top 10 stocks at the start of the month, selling them at the end of the month and then starting fresh with a new group of 10 stocks, would have generated returns, before trading costs and taxes, of 976% through April 30, 2013.

Writer Jon Markman, at the time a columnist for MSN Money, collaborated with company researchers on the tool. Markman suggested rolling over the top 10 stocks every six months to hold down trading costs, a strategy that might be a better fit for most investors; that would yield different results, which would vary based on your starting point.