(B)(N) WY Weyerhaeuser Company

Drama. We’ve been thrilled by the stock price performance of the Weyerhaeuser Company, the name brand in American wood, not just post-Sandy and a string of other woody disasters last year, but since $20 more than two years ago (please see Exhibit 1 below). The Street is late on the work-site and is wondering what to do now (The Street, May 7, 2012, Weyerhaeuser Surges on Sandy, but Wait for Lower Levels). And we don’t know what a “lower level” is, other than a carpenter’s tool that we might use when we bend down to lay wood on a flat surface?

But we note that the price gain since December to the current $31 is only +9% which is rather tepid and makes it only Number 220 of the  S&P 500 companies that we follow, and way behind other “surprises” such as KB Home (+40%) or the Plum Creek Timber Company (+20%) that have been in the Perpetual Bond™ for a quite a while (please see our recent Post, The Wall Street Put, April 2013, for a fuller list of what we “like”);  if we wait for “lower levels”, might not the game be over, and shouldn’t we be buying what other people like?

So we’re checking our stop/loss and “collar”. Our estimate of the downside volatility in the stock price is minus ($3.50) which is slightly more than 10% of the current stock price, but even at $26 it’s still way above the current Risk Price (SF) of $16 rising to $18 (please see Exhibit 1 below). The July put at $30 will cost us $0.80 per share today and the cost of that can be partially offset by the July call at $33 that we can sell at $0.60 per share against our long position in the stock, so that for a net cost of $31 for the stock (if we were buying it today, but we are keeping it) and $0.20 per share ($0.60 less $0.80) for the “collar”, we can collect our dividends of $0.20 per share per quarter for a current yield of 2.5% and ride out the summer storms between $30 and $33 until more information becomes available.

The Street expects a “pull-back” because Jim (Cramer) has been buying the stock since $26 in November (ibid, The Street) and the current P/E is somewhat higher than usual at 34×earnings, if we understand them correctly. We don’t put a lot of truck in that (please see our Post, Earnings Don’t Matter, April 2013), and we wonder if they do.

For example, Louisiana-Pacific is much smaller than Weyerhaeuser and it has a 90× P/E multiple, and also, apparently, “surprised” them with its recent performance (The Street, May 7, 2013, Louisiana-Pacific Is Outperforming the Housing Recovery) but they are now, reluctantly, thinking about buying it on the “pullback” or “lower level” (please Exhibit 2 below). From our point of view, it’s been in the Perpetual Bond™ since $8 two years ago, and we just got sold out on the stop/loss at $18.50; they could be buying our shares.

Exhibit 1: (B)(N) WY Weyerhaeuser Company – Risk Price Chart

(B)(N) WY Weyerhaeuser Company

Weyerhaeuser Company is a real estate investment trust, which grows, harvests, manufactures & sells timbers, softwood lumber, engineered lumber, structural panel, pulp among others. It also provides real estate development & constructions services.

(Please Click on the Chart to make it larger if required.)

From the Company: Weyerhaeuser Company is one of the world’s largest private owners of timberlands and began operations in 1900. We own or control more than 6 million acres of timberlands, primarily in the U.S., and manage another 14 million acres under long-term licenses in Canada. We manage these timberlands on a sustainable basis in compliance with internationally recognized forestry standards. We are also one of the largest manufacturers of wood and cellulose fibers products, and we develop real estate, primarily as a builder of single-family homes. In 2012, we generated $7.1 billion in sales and employed approximately 13,200 people who serve customers worldwide. We are listed on the Dow Jones World Sustainability Index.

Exhibit 2: (B)(N) LPX Louisiana-Pacific Corporation – Risk Price Chart

(B)(N) LPX Louisiana-Pacific Corporation

Louisiana-Pacific Corporation is engaged in the manufacture of building products. It operates in four segments: North America Oriented Strand Board (OSB); Siding; Engineered Wood Products (EWP); and South America.

(Please Click on the Chart to make it larger if required.)

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory; and for our view of the current markets, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013. For a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.