d_teller

Is Now the Time to Buy Paper/Forestry or Building Materials?

Recently an article quoted J. Grantham as saying..."Timber has had an avg 6.5%/yr/100yrs" growth as an investment. But many of the recommended companies looked to their land valuations for development/sales, and their dividends were lower during the housing "bubble", because their P/E's included land sales.

Last Fall, the P/E's, and ebita's started falling. However, after the recent drops in T-rates, the dividends appear: a-large, and the investment prospects appear: b - great. This is appearance and has driven pricing up, for PCL, as an example from 36 to 46.

The question for an investor is: how do the current prices appear relative to the last time that interest rates were first cut and home-builders and land sales had not yet exploded? If the prices look good, go buy. But I think these and other real-asset REITs have moved up in price due to the decrease in treasury yields. They appear to be slightly above a "fairly-valued" point now.

Let's propose a possible scenario: slightly increasing inflation pursuades the Fed to begin raising rates, very slowly, but over a couple of years

+ high commodity prices for construction (lumber, steel, cement, bitumen, wallboard, piping, wiring, insulation, paint, etc.) put a floor under "housing affordability"

+ the necessity of bank lenders to keep mortgages at a higher than (normal to the fed funds ) rate because of a necessity to rebuild damaged reserves,

+ an increasing tax-burden and debt load across all segments of the Developed Nations' economies, preventing central bank economic easing from continuing (they'll still print money, but at a slower rate).

Looking forward, I believe that these factors indicate a slightly more expensive valuation on the "Timber" group, than recent writers here at SA have assumed.