Take Advantage of U.S. Housing Market Recovery; Avoid Real Estate and Homebuilders
Housing-Market / US Housing Apr 02, 2013 - 01:32 PM GMTBy: DailyGainsLetter
John Whitefoot writes: The Dow Jones Industrial Average continues to climb into uncharted territory, trading above 14,500. This is in spite of weak underlying economic indicators. On Main Street, unemployment remains high, consumer confidence is low, and gross domestic product (GDP) remains bleak. On Wall Street, it’s confetti, unicorns, and a raging bull.
But for how much longer? Every four to six years, the U.S. experiences an economic slowdown. It happens like clockwork. The current bull market is now in its fourth year (if you were fortunate enough to even realize we’re in a bull market).
While some investors may be sitting on the sidelines, waiting for a market correction, others are trying to figure out if they should jump in. Thanks to the economic disconnect between the Dow Jones and what the average American is feeling, it’s tough to decide whether investors should stay or go.
In this economic climate, it might be best to think about trading the market—not the economy.
One bright (but fragile) sector that has been performing well is housing (in spite of the fact that housing prices are still down 41% from their 2007 peak). In February, U.S. builders broke ground at a seasonally adjusted annual rate of 917,000. That’s up from 910,000 in January and the second-fastest pace in four-and-a-half years. (Source: “New Residential Construction in February 2013,” U.S. Census Bureau web site, March 19, 2013, last accessed March 28, 2013.)
Is this the shape of things to come? It was also announced that building permits increased 4.6% to 946,000; the most since June 2008, just a few months into the Great Recession.
Where can investors looking to take advantage of the rebounding housing market turn? Lumber and forest product stocks have been on a tear, thanks to the housing recovery. Furthermore, a supply constraint on the heels of sawmill closures during the Great Recession and ongoing demand from Asia means there is still room to run.
Lumber prices have climbed 45% to $385.00 per 1,000 board feet, compared to $265.00 at the end of March last year. Oriented strand board (OSB, or particle board) prices, have doubled to $420.00 per 1,000 square feet from $215.00.
Jacksonville, Florida-based Rayonier, Inc. (NYSE/RYN) is currently trading near $59.00 per share and has seen its share price climb 37.4% year-over-year, up more than 13% year-to-date. The company also provides an annual dividend of three percent. Weyerhaeuser Company (NYSE/WY) is currently trading near $31.00 per share and is up 45% year-over-year and 12% year-to-date. Weyerhaeuser provides an annual dividend yield of 2.2%.
Currently trading near $10.25 per share, International Forest Products Limited (TSX/IFP-A) has seen an increase in its share price of 114% year-over-year and 27% year-to-date. Ainsworth Lumber Co. Ltd. (TSX/ANS) has seen its share price climb more than 175% year-over year and is up 46% year-to-date.
While lumber prices can correct quite sharply, there continues to be a number of great opportunities for investors looking to diversify their retirement portfolio with lumber products while capitalizing on the housing market.
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