Forestry Companies May Become Excellent Bargains

One of the keys to staying ahead of the game in money management is lateral thinking. I start with the trend, and then try to think of industries or companies that might benefit, but are not on everyone else's radar. With Peak Oil-driven demand for biofuels, regular readers know that I consider the people who produce the feedstock (farmers, and industries whose waste can fairly easily be converted into biofuel) to be the most certain winners.

One direction this chain of logic has taken me is to forestry companies. I'm far from a forestry analyst, so I decided to take small stakes in a few of the more sustainable forestry companies. When it comes to wood products, the gold (or is it green?) standard for sustainable certification is the Forest Stewardship Council's. Do not be fooled by watered down industry sponsored pretenders like the Sustainable Forestry Initiative. Last year, to find sustainable companies, I went to the FSC's list of certified forests, and looked for large numbers that were owned by public companies.

The companies I came up with: Domtar (UFS), Tembec (TMBAF.PK), Cascades, Inc. (CADNF.PK), and Potlach (PCH). I later added Catalyst Paper (CTLUF.PK) to my list when reading a news story that, as an aside, mentioned them as a sustainable leader in the Canadian wood and paper industry.

Scientific? Not at all. I consider my investments in sustainable forestry as a diversification with an interesting alternative energy long term upside. Needless to say, my investments in each company are small. The ones that didn't make it into the Energy Tech Stocks Interview were ones that had slipped my mind. I did not end up purchasing them due to the price movements at the time (i.e. my other limit orders executed first).

I'd love to see comments from readers who know more about sustainable forestry than I do... I'm sure that there are some stand-out forest stewards that I missed when I put together this little diversification. I personally expect the subprime mess to lead to a prolonged housing slump, at which time even further depressed forestry companies may be excellent bargains... if they are not bankrupt.

Disclosure: Tom Konrad and/or his clients have positions in the following companies mentioned here: UFS, PCH, CTLUF.

Comments

[strutzma]

Tom,
It might be interesting to talk to someone in the biotech field who is involved in celulosic ethanol research and ask if there would be differences or difficulties in processing certain types of forest products [softwoods (pine/spruce) vs. hardwoods (aspen/oak/maple)], since these two groups are going to have different chemicals that may affect the digestion process (i.e., may kill/retard the digestion mechanism/microbe). From there, you may be able to look at companies' different land holdings to find the ratios of hardwood/softwood they currently own. From my experience, larger landowners tend to convert hardwood forests to softwood following a cut prescription (clear-cut, seed tree, etc.) due to the higher growth rates. I'd be interested to see if anyone in the biotech community has any information on this, or similar, information.
Off of the top of my head, I know that hardwoods sit longer on the forest floor and do not break down as quickly as softwoods due to their higher tanin component. This may directly extrapolate to the celulosic ethanol digestion process unless the microbes were designed specific to the type of celulose.