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In this edition of the Alpha Letter, we cover:
Dividend Growth: A look at Timber REITs
Stocks & Options: The option flow tells us which stocks to watch
Real Estate: Running the numbers on a value-add self storage deal
Interested in lumber?
Social media has been buzzing about lumber futures, which have seen a historic rise over the last few months. But futures aren’t accessible to most retail investors. The next best thing for retail investors is REITs.
We took a look at a few of the main lumber REITs to decide which ones are good long-term plays for dividend growth investors.
According to this article by Hoya Capital Real Estate, “long term fundamentals look compelling amid historic levels of demographic-driven housing demand and record-low housing supply.”
Lumber prices are likely to stay elevated for a while as demand for new construction homes is unlikely to subside. There are some concerns about “overheating”, as it’s now fairly common for contractors to delay projects due to high material costs and/or delays in receiving lumber from suppliers.
While you may be able to quickly jump in and out of some lumber or other commodity-related stocks for a quick 10% gain, we’ll be focusing on mid to long-term opportunities with the potential for much high gains.
Therefore, lumber REITs are a great place to look. They aren’t tied to one company’s ability to successfully operate a business. Rather, they invest in timber land spread out across the country.
Weyerhaeuser Co (NYSE:WY) is the largest timber REIT at a $28 billion market cap, with timber land in the Pacific Northwest, the South, and Canada. It’s up 91% over the last year, which is phenomenal for a land REIT.
Historically, WY’s stock hasn’t fluctuated more than 5 or 10% in a year.
WY’s current dividend yield is 1.82%, which has definitely been pushed down by the rapid appreciation of the equity. For comparison, WY’s dividend yield was approximately 3.67% at this same time last year.
Peter @pingkindFaithfully checking #lumber everyday and today, fresh air! Something seems to be changing. https://t.co/yCluAkteYv
It’s expected that WY will either continue to appreciate in the mid-term, or management will increase the dividend based on the trust’s asset appreciation and increased cash flows. It’s unlikely that both happen, but this could be a good long-term dividend play because the likelihood of a dividend increase at some point is a strong possibility.
WY reported its strongest quarter on record recently with a 45% sales increase and 166% surge in EBITDA year-over-year.
Here are a few other lumber REITs to look at
Rayonier (RYN): +71% in 1 year, 2.85% dividend yield
Potlatchdeltic Corp (PCH): +82% in 1 year, 2.78% dividend yield
Catmark Timber Trust (CTT): +69% in 1 year, 4.49% dividend yield
Another interesting timber play is Keweenaw Land Association (KEWL). Keweenaw is an OTC listed pink stock with a market cap of only $106 million and enterprise value of $112 million. Keweenaw owns 183,399 timber acres in Northern Michigan and Wisconsin implying a value per acre of only $610/acre.
What is interesting about Keweenaw is that Jamie Mai from the Big Short owns over 25% of the stock and has turned the company around from a prior management team. Keweenaw doesn’t generate much in cash flows but someone who wants to own a bunch of land and has an extremely long-term horizon will likely do well holding the stock.
Markets to Forecast the Future
On Monday, we asked our readers whether Tesla would accept Dogecoin as a payment method. We did our research on what Musk tweeted over the weekend to give you the latest on what the future might hold for Elon and crypto.
Now what if you could ask the market what it thinks? Well, you can.
On Polymarket, traders are pricing in a 12% chance that Tesla will accept Dogecoin as a payment method before mid-June.
What’s great about this product is that you can see a variety of market-based probabilities spanning politics, economics, coronavirus, and even Doge completely free.
Additionally, if you have an information edge, you can trade to make a return on what you know. Based on these probabilities, traders who don’t believe Tesla will accept Dogecoin stand to make 10%.
Stocks & Options
Let’s take a look at what the option flow is telling us.
One option scan I like to use is the “Insider Bulls” scan on the Options Matrix. This scan looks for stocks that have relatively high insider ownership and then scans for options with high executed volume on the day.
One stock whose options show up multiple times in this scan is Sorrento Therapeutics (SRNE).
The $7 and $7.50 calls expiring Friday saw large volume on Tuesday. SRNE closed at $6.87, so the high open interest in those weekly out of the money calls tell me that at least one person is making a large bet on SRNE jumping again this week.
SRNE is up 10% since last Thursday, but has been up and done over the last several weeks.
Here are a few other names showing up in that scan:
One of the most insightful follows on Twitter for an inside look at real estate investing is Nick Huber. The other day, he posted the P/L statement for the first four months of a self storage facility he bought for $1.3 million last year.
Here are the financials from that tweet:
Based on April 2021 net income, the annual invested return would be 14.5%.
Huber is a value-add self storage investor. His investment thesis is to find self storage facilities in 3rd-tier markets or in rural areas running on antiquated pen-and-paper systems.
He buys the facility and incorporates technology to introduce recurring payments and lower the man time needed to run the facility. While increasing monthly income by 50% within four months of taking over the property may seem difficult, it’s very possible with the real facility and market.
Oftentimes, self storage facilities (and other businesses) are not optimized at all. Usually, older owners have made their money and aren’t incentivized to maximize revenues and profits anymore.
Think you can find one of these facilities for yourself?
Oftentimes these facilities are listed on LoopNet or other real estate sites, but just as often they aren’t. Huber, and other investors like him, spend part of their time seeking out self storage owners who may be interested in selling at the right place but haven’t actually listed the property for sale.
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