Plumb Creek Timber: Trees are Forever

Wall Street loves to hate timberland, but my readers sure love it. In less than five months, the five timberland stocks I've recommended at one time or another in my newsletters are up an average of 45%. Just take a look:

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Take Plum Creek Timber (PCL) for example. Plum Creek is the largest timberland owner in the United States, with more than 8 million acres of timberland.

Five months ago, in mid-September, the shares bottomed at $31.21. As I write, shares of PCL are above $40 – clearly a great performance. But not a single brokerage firm that I'm aware of even has a "buy" recommendation on the stock. I've never known a time when Wall Street liked this stock. Yet Plum Creek is up by 1,300% since 1989.

PCL 10-yr chart

You might think the stock must be expensive if it's risen this much. It's not. The market is currently valuing Plum Creek at about $1,000 an acre. I would pay a premium to buy a diversified portfolio of professionally managed timberland like Plum Creek's. But this price is a real discount – a bargain.

Up until the last five months, timberland stocks have been the best-kept secret on Wall Street. Professional investors have finally woken up... they finally see the huge "built-in" yields in timberland, and they're buying.

When you compare the built-in yield of timberland to any other asset class out there, timberland wins, hands-down. The only problem is timeframe – you can sell a stock or bond immediately, but you can't get rid of acres of timber like that. You've got to hold it for some time to maximize its value – the ideal timeframe is infinity.

Investors who take positions with a timeframe of infinity (like pension funds) are finally catching on. They've finally realized they're in the business of paying out to pensioners for infinity. So they need to own an asset that will pay them for infinity as well.

I bet that in 20 years from now, pension funds will own more timberland assets than anyone else. As this shift occurs, I expect the price of timberland will go way up. It wouldn't surprise me at all to see large investors like these borrowing money to buy timberlands either, as the cost of borrowing to buy timberland now is much cheaper than the return on that money. As long as that's the case, timberland prices will rise.

We have pocketed a 100% gain in eight months on Sino-Forest, a large owner of timberland in China. Yes, we owned the stock for just eight months. So you can't just buy anything at all... some things have gotten overpriced. We also sold half of another position that jumped 50% fairly quickly.

In addition to the built-in growth, timberland stocks have another way to make big money... land sales to real estate developers. Plum Creek plans to grow land sales to $500 million a year. That's just land sales to developers – this is not even their core business. The stock market value of Plum Creek is only $7 billion.

Timberland stocks have run up in the last five months, so I have taken profits on a few where the profits were a bit silly. The smart way to play timber is to see them as "forever stocks" – like the pension funds will.

Investors who bought Plum Creek in 1989 are up 1,300% today. I expect the gains going forward in timberland stocks like Plum Creek to be very good as well.

Trees have been better than stocks. And they will continue to be. Own them for the long run...