Weyerhaeuser will benefit from housing -- eventually

A housing pickup will probably be relatively modest this year.

By Jim J. Jubak May 22, 2012 7:24PM
Image: Home under construction (© Corbis)One more dip should do it.

I put Weyerhaeuser (WY) on my watch list Tuesday. I added the stock to my Jubak Picks 5 long-term portfolio back on Jan. 13 because in the long-term, I think it's a good way to profit from the eventual recovery of the U.S. housing sector. Since then, the shares have done just about nothing -- they're down 2.7% as of 3 p.m. on May 22. But the stock pays a 3.1% dividend, so from a long-term perspective, I'm willing to wait for the turn.

But from the shorter-term 12-18 month perspective of my Jubak's Picks portfolio, I'd sure like to buy closer to the turn in the sector. Tuesday's numbers on existing home sales say that turn continues to approach -- although it's not quite here yet. 

If Wednesday's numbers on new home sales confirm this trend, I'll be looking to buy on the next dip toward the stock's 200-day moving average of $18.43. That's roughly 6% from the stock's $19.54 price at 3 p.m. ET on May 22. Not a huge amount, but I’m looking not just to reduce my purchase price but in this 12-to-18 month portfolio to shorten the period between buying and profiting.

The data released this morning show a continued recovery in existing home sales to an annual rate of 4.62 million in April from 4.47 million in March. Economists surveyed by Briefing.com had expected sales to increase to a 4.65 million annual rate.

Although the data was positive, digging down a level raised a worry or two. Distressed sales -- the sales of properties in foreclosure (or pre-foreclosure) -- fell to just 28% of sales in April. That’s a slight dip from the 29% of sales represented by distressed sales in March and a big drop from the 34% in February and the 37% in April 2011.

What seems to be happening is that banks are holding these properties off the market in the hope of getting a better price in the not-so-distant future. That hope is one reason to think that the housing turn is approaching but it also suggests that the so-called shadow inventory, foreclosed properties that banks want to sell but that aren’t yet officially for sale, is rising. That means that the 10.1% year-over-year increase in the median home price in April is likely to be reversed when banks finally decide to sell.

This timing is extremely important to Weyerhaeuser since through a series of divestitures the company has turned itself into a concentrated play on timber, wood products, and real estate. New home construction -- which is the sector where Weyerhaeuser has its current concentration -- is sensitive to competition from both the prices of existing homes and to the inventory of existing homes.

I think the recovery in the housing market is likely to be relatively modest this year and that is likely to lead to only modest increases in the demand for and the price of lumber. I get a $23 12-month target price for these shares. From Tuesday’s price of $19.54, that would be a 17.7% gain. From the $18.43 200-day moving average the gain would be 24.8%. The higher gain is more commensurate with current market risk, which is why I’ll wait for the dip.

Weyerhaeuser has converted to a REIT (real estate investment trust) so that as cash flows rise so will dividend payouts. I think that’s a prospect for 2013, however, and not 2012.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. post. The fund did not own shares of Weyerhaeuser as of the end of December. For For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
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