Looking for Profits in Timber

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.


Although it wasn’t a terrific week for global financial markets, your Bull Market Alert portfolio held up well. Your two healthcare stocks, Alexion Pharmaceuticals (ALXN) and Novo Nordisk A/S (NVO), both ended the week higher. Global telecom play Millicom International (MICC) hit a 52-week high. And with production resuming at Toyota Motors (TM) at faster-than-expected rates, the Japanese automaker was the week’s strongest performer, rising 5.41%. You may want to add to your position at these levels.

The commodities and energy-related positions Alliance Resource Partners L.P. (ARLP) and Nabors Industries (NBR) continued their sell-offs, though they found their footing toward the end of the week. These sharp sell-offs can be psychologically tough, but they are part and parcel of the investment game. Recall that last year, emerging markets sold off by close to 17% in January and another 13% in May. Yet the worst decision was to exit the market en masse. So the best strategy is to keep your investment cool, and limit your investing to the defensive sectors in the market.
 
This week’s Bull Market Alert pick focuses on just such a defensive sector: timber. Legendary value investor Jeremy Grantham argues that timber is the only low-risk, high-return asset there is. After all, it has risen steadily in price for 200 years and has returned an average of 6.5% a year for the last century. It also holds up better than almost any asset class during unrelated sell-offs in the market.
 
My favorite way to play timber is through this week’s Bull Market Alert pick, Jacksonville, Fla.-based Rayonier Inc. (RYN). Rayonier is one of the biggest players in the U.S. timber sector, owning, leasing or managing approximately 2.5 million acres of timberland and real estate, mostly in Georgia, Florida and Alabama. The company also has a joint venture for 350,000 acres in New Zealand and it manages another 100,000 acres in Australia.
 
Rayonier recently reported first quarter net income of $58 million, or 70 cents per share, compared to $57 million, or 71 cents per share, in the comparable prior year period. The company’s cash situation is much more impressive, with cash provided by operating activities hitting $116 million compared with $91 million in first quarter 2010. 

The company recently increased its 2011 guidance and now expects earnings of $2.85 to $3.10 per share, an increase from previous guidance of $2.50 to $2.70 per share. Rayonier is also a real estate investment trust (REIT), for federal income tax purposes, and thus is not subject to federal income tax on its REIT income that it distributes to its shareholders. On that front, the company expects cash available for distribution to hit $285 million to $310 million this year — an increase from the $260 million to $280 million, previously estimated. It currently yields about 3.3%.

 
Technically, the stock broke out to the upside in late April. More importantly, even as most commodities sold off recently, the stock is up more than 10% over the past month.
 
So buy Rayonier Inc. (RYN) at market today and place your stop at $59.00. If you want to play options, I recommend November $70 calls (RYN111119C00070000). Be advised, though, that these options are quite illiquid. 

Portfolio Update

Alexion Pharmaceuticals (ALXN) rose 3.8% this past week. The stock will split 2 for 1 on May 20. As a stock in the defensive healthcare sector, and now trading above its 50-day moving average, ALXN is back to a BUY.
Alliance Resource Partners L.P. (ARLP) fell 4.37%. Despite the sell-off in commodities, it’s important to emphasize the fundamentals of the stock are still intact. Consensus estimates for 2011 recently rose from $7.47 to $7.74. But trading below its 50-day moving average, ARLP is a HOLD.
Bank of Ireland (IRE) fell 4.19% this past week. According to Harris Associates, Bank of Ireland’s largest institutional investor, Bank of Ireland has a “good chance” of avoiding state control by offering junior bondholders an opportunity to convert to equity. Trading below its 50-day moving average, IRE is a HOLD.
Joy Global (JOYG) dropped 2.25% this past week. With earnings coming out on June 2, I believe the stock has a good chance of reaching its target of $112 to $120 in the coming months. Joy Global announced today that it will buy mining and oil and gas drilling equipment maker LeTourneau Technologies Inc. from Rowan Companies Inc. for $1.1 billion in cash. But with JOYG trading below its 50-day moving average, and dangerously near its stop price of $86.00, I am keeping this at a HOLD.
Millicom International (MICC) ended the week 3.64% higher, after hitting a 52-week high of $111.36 last Tuesday. Once the stock penetrates through its current resistance level of $111.50, I believe the stock is set to move sharply higher. With the global telecom sector coming back into vogue, Millicom remains a BUY.
Nabors Industries (NBR) dropped 2.41% last week. The news that President Obama is extending oil company leases in the Gulf of Mexico and Alaska may benefit the sentiment surrounding this stock. NBR is a HOLD.
National Bank of Greece SA (NBG) ended the week flat. Trading at a price-to-book (P/B) ratio of 0.4 and with 30% of its loans coming from subsidiaries outside of Greece, I am still bullish on the stock. That said, I concede this a tough one to hold onto. NBG remains a HOLD.
Novo Nordisk A/S (NVO) rose lightly this past week. Healthcare is a relatively strong defensive sector. But trading below its 50-day moving average, NVO is now a HOLD.
ELEMENTS Rogers Intl Commodity Agri ETN (RJA) fell slightly this past week. Trading below its 50-day moving average, this bet on agricultural food prices remains a HOLD.
Sohu.com (SOHU) got off to a positive start early in the week, but then sold off sharply on Thursday and Friday, in response to worse than expected earnings from Sina.com, which I recommended that you sell last week. With Sohu trading at a perfectly reasonable forward price-to-earnings (P/E) ratio of 15, this is a case of the baby being thrown out with the bathwater. But with the stock now trading below its 50-day moving average, I am moving it to a HOLD.
 
Toyota Motor Corp. (TM) jumped 5.41% this past week. On Wednesday, the giant automaker reported a 77% drop in net profit for the January-March quarter. But for the full year ended March 31, Toyota reported a net profit of $4.7 billion, almost double last year’s number. Toyota executives are abandoning their worst-case predictions, saying that factory output (currently running at about 30% of capacity) should be up to about 70% in June. With all the bad news already priced into the stock, it is starting to bounce as I expected. Now trading above its 50-day moving average, Toyota is back to a BUY.

 

Exclusive  Daily Data Flow: Stocks Fluctuate on Europe Concerns; Oil Flat Today; Euro Falls against Dollar

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It was a topsy-turvy week for your Alpha Investor Letter portfolio. Last week saw a sharp sell-off in your positions, while this week they have begun to recover.
 
With oil dropping 27%, and silver tumbling 27%, the sell-off in commodities was big. London's Clive Capital, the world's largest commodities hedge fund, noted that the drop in the price of Brent crude was a “five standard deviation event.” According to my back of the envelope calculat

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