Warren Buffett's annual letter to shareholders is one of the
most highly anticipated reports in the financial community. (You
can find a copy of his latest letter
Every year, investors around the world anxiously wait to hear what
the world's most prolific investor has to say about what lies
ahead... this year was no exception.
As always, this year's report sheds some light on the inner
workings of Buffett's mind and identifies specific areas of
opportunity... and his latest prediction might surprise you.
Believe it or not, Buffett, in his 47th annual letter, has given a
ringing endorsement to what is arguably the most spurned of all
In fact, he boldly claimed that it would be smart for affluent
investors to purchase not just a second or third home, but "
up" on "hundreds of thousands" of single-family homes.
I couldn't agree more.
After the most devastating crash on record, home prices are dirt
cheap in many markets. In fact, it is now cheaper to buy than rent
in 98 of top 100 metropolitan areas. And let's not forget that
rates are at historic lows.
Of course, we've been waiting for the housing recovery to kick off
for some time now. But the past few months have brought real,
tangible signs of progress.
hit a three-year high in January by rising to an annual pace of
705,000 units. That's almost 100,000 more than the total from
Department reports that new home construction permits reached an
annual rate of 717,000 in February and then 747,000 in March, the
strongest pace since 2008.
--Builders have just begun work on new condo and apartment
developments at a pace of 241,000 units annually, a 21% increase
from multi-family construction projects this time last
-- Median new home prices have bounced 8% over the past 12
months to reach $233,700.
-- Homebuilder sentiment has risen in six of the past seven months,
touching a fresh five-year high in March.
The surge in permits is a reliable
of future groundbreaking. And housing is expected to add to
(rather than subtract) this year for the first time since 2005. In
fact, ratings agency Fitch is forecasting a healthy 10% increase in
new home construction in 2012, versus a 9% drop last year.
Now, most of us lack the idle cash to buy up entire neighborhoods
or invest in new developments like Buffett does. But fortunately
for us, there is another way to can take advantage of the housing
After all, how can you build houses without more wood? You can't.
And that's exactly why I think timber owners are primed for a
strong rally in the coming year.
One such company is
, one of the world's largest integrated forest products companies.
Weyerhaeuser owns vast tracts of shady land in Arkansas, Louisiana,
North Carolina and several other states, some six million acres in
The company is fortunate in that it owns two million prime acres
(33% of the firm's total) in Oregon and Washington -- the industry
. As a result, each of Weyerhaeuser's acres generates $80 in annual
on average. That's far superior to two of its biggest rivals,
) and Plum Creek Timber (
And timberland only accounts for one-quarter of the company's
The largest segment, with $2.3 billion in annual sales (38%), is
wood products, which includes boards, plywood and other finished
goods used to build homes and businesses.
This unit is currently operating at a loss, which isn't terribly
surprising given the operating environment. But to give you an idea
of what it can do under better conditions, the company was shipping
nearly $10 billion worth of wood products per year before the crash
-- four times what it sells today.
But even under dismal conditions, Weyerhaeuser still managed to
generate $330 million ($0.62 per share) in net profits last year
across all the company's business divisions. And it wasn't even
jogging, let alone running at full speed. That's why I'm looking
ahead to tomorrow.
Management calculates that the wood products unit needs 665,000
housing starts per year to turn a
. Builders are currently breaking ground at an annualized pace of
750,000 -- and even that's just half of the 1.5 million new homes
built on average each year since 1971.
Keep in mind, as a
real estate investment trust (REIT)
, the company aims to distribute at least 75% of its pre-debt
. Shareholders can currently look forward to $0.60 per share in
annual dividends, for a
I expect those payments to climb significantly in the coming years
as housing wakes from its slumber and construction picks up. In the
meantime, demand from overseas remains brisk -- the company
exported $370 million in logs last year to Japan, China and South
Risks to Consider:
Of course, with investing nothing is 100% certain. The housing
is still fragile and nowhere near full strength. So initially at
least, I think we'll see an uneven recovery where hits are
occasionally punctuated by misses.
Action to Take ---->
But, that said, the fact remains that the U.S. isn't building
nearly enough new homes to keep pace with the number of new
households being created. Eventually, the two will come back into
balance. And when they do, timber owners could be a clear
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority owns shares
of WY in one or more if its real-money or investment
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