We surely live in uncertain times. Themarket continues its
impressive multi-year rebound in hopes of an ever-firmingeconomy ,
yet there are still enough headwinds in place that might bring the
rally to a halt. In effect, we have no clear read on whether the
broader market has already seen its highs for the year, or whether
we're about to see further strong gains in the next 11 months.
Although we're still in this broader market haze, there's
greater clarity on a pair of sectors that are surely poised for
good news this year:real estate and energy. The housing market has
clearly turned a corner and
looks poised for a multi-year upturn
, while heavyinvestments in new technologies are bringing
fresh life to oil and gas fields
Very few companies can say they have a foot in the door of both
of these sectors. But one company was spun off as a standalone
entity during the past decade to precisely play that angle:
Forestar Group (NYSE:
This company has actually been around for nearly 60 years,
though in its first half century, it was known as Lumberman's
Group. It was a sleepy business, mostly focused on growing trees to
provide lumber for the country's furniture makers and home
builders. Lumberman's was eventually acquired by Temple-Inland
(which is now owned by
International Paper (NYSE:
), and was spun off in late 2007 at $24 a share. And then the
bottom fell out of the housing and real estate markets, and
thisstock eventually fell into the single-digits.
Shares are now on the mend, recently movingback up into the
upper teens, thanks to signs that the company's development
strategies are springing back to life.
Forestar is now pursuing nearly two dozen real estate
development projects, with plans to launch 50 or more new projects
once the real estate market really gets going. (And if you've read
Carla Pasternak's articles recently, then you probably know
it's only a matter of time
before we see that happening.)
Forestar's real estate approach is simple and direct. The
company intends to only build on properties that are near good
school districts, have strong employment growth and can be priced
low enough to attract first and second-time home buyers. This is
precisely the demographic that has been forced into renting during
the past five years, while the housing market tanked. The company
has found that it generates a 100% to 200% return on every property
it's developed and sold. The proceeds from sold developments have
gone toward further real estate acquisitions.
Oil, gas and minerals
But buried under all of the land that the company owns is a hidden
gem many investors may not have noticed.
Forestar's real estate holdings are right in the heart of oil
country. There are now more than 900 wells in operation on the
company's properties. Forestar traditionally sought to simply
capture oil and gas royalties and let other firms tackle the
challenges of energy exploration.
But management realized it was wiser to gain more control of the
profits that these oil wells could generate, so in September 2012,
Forestar acquired Credo Petroleum for $146 million incash . That
gave the company badly-needed industry know-how, and since it
is also now an energy-exploration firm, the companywill
be able to place a more precise value on its energy
"Both Forestar and Credo have seen their respective production
(and reserves) increase substantially since 2010,"note analysts at
D.A. Davidson. Forestar produced less than 200,000 barrels of oil
in 2011, but this figure may approach 700,000 barrels this year.
Roughly 75% of Forestar's energy output is tied to oil and around
25% comes from natural gas.
Finally, Forestar's land sits on top of a number of water
aquifers, especially in Texas, which has become increasingly
parched over time. "One thing is clear, owning water in Texas could
be quite lucrative, considering its status as the fastest growing
state in the union, plagued by drought and competing for water with
adjacent states," add Davidson's analysts.
Risks to Consider:
With exposure to the housing and energy sectors, this is an
economically-sensitive stock, so any slowdown in the U.S. economy
would deal a clear setback to this stock.
Action to Take -->
As a real estate and energy developer, this is a hard company to
measure against near-term sales andprofit metrics.
But for the record, Forestar'snet income is likely to more than
double this year to between $22 and $24 million, and rise another
50% in 2014 toward the $35 million mark. This means shares trade
for nearly 20 times projected 2014 profits.
Instead, it's important to look at this stock as anasset play.
The company trades for roughly 1.4 times tangiblebook value , but
many of its assets are carried at cost, not reflecting the
long-termearnings they can generate. This could make a stock like
Forestar an interestingoption to consider forinflation protection
at the very least, with the possibility for significantupside as
-- David Sterman
P.S. -- The abundance of natural gas in the U.S. could lead to a
third industrial revolution. One analyst is predicting a stock
could rise 1,566%. Another stock has already jumped over 1,000% and
is expected to keep going. To learn more about investing in the
natural gas boom, click here.
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.