Before completing Monday's discussion of rising lumber costs and the ripple effect of America's resurgent housing sector... let me make a quick distinction between lumber and timber...
Lumber is wood that has been cut down and processed. Timber is wood that's still attached to the Earth (as a tree)...
Timber has long been a hedge for the wealthy against inflation. In addition to providing good risk-adjusted returns, timber has also been a "noncorrelated asset." In other words, the rise and fall of stock prices don't typically have any relationship to the price of timber. And because in general, you only have to cut down your trees when prices are good (trees doesn't spoil), timberland is a low-volatility asset.
The best way for individual investors to buy timber is through the well-established, large timber real estate investment trusts (REITs): Plum Creek (PCL), Rayonier (RYN), and Potlatch (PCH).
Because these companies are structured as REITs, 90% of what they make goes to shareholders in the form of a dividend. They all yield around 3% right now.
We follow Plum Creek in Stansberry Data. It's among the "trophy assets" we track... And based on our valuation methods, the stock is too expensive right now. But we're watching this sector for a correction.
You can also buy timber exchange-traded funds (ETFs) – two prominent ones sport the tickers "CUT" (Guggenheim Timber Fund) and "WOOD" (iShares S&P Global Timber & Forestry Index). These funds hold shares of the major timber REITs, paper companies, and other related firms.
As you can see from the chart below, even though real estate has performed well over the past two years – represented by the Dow Jones U.S. Real Estate Index – timber has outperformed...
Today, in addition to the 3% annual yield we mention above, the timber REITs offer capital gain potential should the rise in homebuilding and lumber prices continue. Unlike cash, wood prices (specifically "stumpage prices," which incorporate the economic value of the entire tree) have beaten inflation over the last century.
It beats putting your money in the bank at zero-percent interest.
How to collect 3% yields and beat inflation...
The housing market is improving... And that means homebuilders are buying more lumber. In today's Digest Premium, we show you a way to profit from that trend and collect healthy dividends.
To continue reading, scroll down or click here.
How to collect 3% yields and beat inflation...
How to collect 3% yields and beat inflation...
The housing market is improving... And that means homebuilders are buying more lumber. In today's Digest Premium, we show you a way to profit from that trend and collect healthy dividends.
To subscribe to Digest Premium and access today's analysis, click here.
A new use for natural gas... Wal-Mart goes American... Germany speaks up on gold... Carl Icahn buys Transocean... New highs for 'the best business in the world'...
One industry is finding yet another use for cheap natural gas...
According to the trade publication Oil & Gas Journal, oil and gas producer Apache (with the help of oil services firms Halliburton and Schlumberger and equipment maker Caterpillar) is working to convert its drilling equipment to run on natural gas instead of diesel. And the cost savings would be huge...
In 2012, the industry will have used more than 700 million gallons of diesel through the tools needed to perform hydraulic fracturing. ("Fracking" is a key technique in extracting oil and gas from shale formations.) That's $2.38 billion, using recent average prices of $3.40 per gallon.
Converting these operations to natural gas would reduce fuel costs by 70%, according to Apache Executive Vice President of Technology Mike Bahorich.
Consider these numbers from Apache... One of its "frack jobs" in the Granite Wash at the Stiles Ranch field in Texas typically uses 36,290 gallons of diesel to complete the job. Using an average price of $3.40 per gallon, the total fuel cost for one job would be $123,386. At current natural gas prices, the cost drops to $74,473. And Apache has up to 12 frack jobs running at one time.
"This is a real trend, and it's happening now. We're witnessing a sea change in the industry that will have a great impact not only on how much less oil is imported but also will help keep our air clean," Bahorich said. "By using field gas, the U.S. would import 17 million fewer barrels of oil each year to make the diesel to fuel these fracs."
We discussed how low natural gas prices are also attracting manufacturing and chemical companies back to the U.S. in the January 3 Digest. And the trend is only strengthening.
The cost savings are so significant, even Wal-Mart is switching back to "Made in America." On Tuesday, the country's largest retailer told suppliers it would add $50 billion of American-made products to its shelves over the next 10 years.
In the last fiscal year, Wal-Mart spent $335 billion on buying and transporting products globally... So the $5 billion a year is only 1.5%. But other retailers will follow suit.
And the job creation that results in the U.S. will only feed Wal-Mart's customer base.
William Simon, Wal-Mart's U.S. CEO, told the audience at the National Retail Federation convention in New York this week, "A few manufacturers have even told Wal-Mart privately that they have defined the 'tipping point' at which manufacturing abroad will no longer make sense for them."
Yesterday, we updated you on Germany's intention to remove its gold from central banks in New York and France. Today, Bundesbank, Germany's central bank, made an official announcement on the subject...
Bundesbank said it will store half of Germany's gold reserves at its own vaults in Germany by 2020. The other half will remain in storage in New York and London. The bank said the purpose of the move is "to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold-trading centres abroad within a short space of time."
The U.S. portion of reserves will be reduced from 45% to 37%. As we said yesterday, this move shows a loss of faith between central banks... It's not a need to transact faster.
Billionaire investor Carl Icahn is extending his reach into the energy sector. He disclosed he's taken an effective 3.2% stake in offshore drilling contractor Transocean. He owns 1.5% of the equity, but also has an additional 1.7% "synthetic long position," through options. He's notified the company that he may seek to purchase up to 5% of the company.
Transocean is the world's largest offshore drilling contractor. The company claims to hold the world record for deepwater drilling – of 10,194 feet, nearly two miles. It owned the Deepwater Horizon rig that exploded in the Gulf of Mexico in 2010. The company recently reached a $1.4 billion settlement in relation to the accident. And its share price has languished since the disaster... at times, trading for less than half its valuation prior to the Gulf accident. But since the settlement, the share price is up. Shares have jumped 23% since December 31.
Barclays analyst Harry Mateer told Bloomberg that Icahn is likely to push Transocean to reinstate its dividend or implement share buybacks. Mateer also said the company's bondholders might be concerned Icahn may attempt to restructure the company into a master limited partnership (MLP) – which distribute their free cash to shareholders and don't pay taxes. That might put bondholders at risk if the company subordinates their claims to new debt that it could issue to buy cash-generating assets.
The market values Transocean today at $20 billion. Latest filings show the company has $14 billion in debt. That's high. But filings also show it carries $6 billion in cash.
Credit ratings agency Standard & Poor's rates the company's debt triple-B-minus. That's one level above junk. Transocean CEO Steve Newman said in September the company aims to retain its investment-grade rating by reducing debt to between $7 billion and $9 billion.
Icahn loves undervalued companies, and he's an active investor. He has succeeded in past ventures in applying pressure on boards. He likes to take a big enough stake so he can stir things up in the boardroom and increase shareholder value. Last year, he bought into Chesapeake Energy, where he ultimately forced the company to replace four board members.
He also bought the refiner CVR Energy after the board knocked back his constant pleas to sell the company. As Philip Adams from Chicago bond research firm Gimme Credit LLC said, "Mr. Icahn and his affiliates may simply agitate to be more aggressive in financial policies."
We expect more news on this deal over the coming weeks and months as Icahn applies pressure on Transocean's board.
Porter wrote about Transocean in his special report "How to Own the World's Trophy Assets." So far, he hasn't recommended the stock… but readers of his Stansberry Data service know it's on his watch list. And they'll be the first to hear from Porter on any change to his recommendation.
Stansberry Data is a weekly service available to Investment Advisory readers who have opted to upgrade their subscription. It provides access to Porter's sectorwide analysis of "trophy assets," oil and gas exploration, and insurance. To receive more information on these exclusive updates, click here...
While Porter hasn't recommended Transocean, he has recommended property-and-casualty insurance (P&C) company American Financial Group (AFG). And it's on a tear. Shares of the $3.7 billion Cincinnati-based company hit an all-time high this week.
Porter calls insurance the "best business in the world." In the October issue of his Investment Advisory, he told subscribers their "'safe' money ought to be in insurance stocks." Legendary investor Warren Buffett understands this concept, too. Insurance was the foundation of his $236 billion conglomerate Berkshire Hathaway.
In the same issue… Porter explained the simple reason why insurance is such a great investment...
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Insurance is the only business in the world that routinely enjoys a positive cost of capital. In every other business, companies must pay for capital. They borrow through loans. They raise equity (and most pay dividends). They pay depositors. Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations.
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But a well-run insurance company will routinely not only get all the capital it needs for free, it will actually be paid to accept it. We've seen Swiss banks offer negative interest rates on savings accounts before – but these are isolated and temporary examples. Insurance companies are all paid a fee to manage capital. All of them.
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The beauty of insurance is that you can get paid to use capital. That's a fantastic way to become very wealthy. And it's precisely how (along with several great stock picks) Buffett became the world's most successful investor.
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That issue is an outstanding educational overview of the insurance industry. Porter and his research team presented subscribers with their proprietary ranking system of the industry. Their Insurance Value Monitor rates the 25 major U.S. P&C insurance companies... and assesses whether their shares are cheap or expensive. They recommended five insurance stocks in the issue. Readers are up an average of 5% on those stocks… including a 10% gain on AFG.
New 52-week highs (as of 1/15/13): Berkshire Hathaway (BRK), PowerShares Buyback Achievers Fund (PKW), Sequoia Fund (SEQUX), Monsanto (MON), RPM International (RPM), 3M (MMM), Chicago Bridge & Iron (CBI), Navigators Group (NAVG), Travelers (TRV), Kohlberg Kravis and Roberts (KKR), Becton-Dickinson (BDX), Southern Copper (SCCO), Government Properties Income Trust (GOV), Two Harbors (TWO), Walgreens (WAG), and GenMark Diagnostics (GNMK).
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