One of the first things a day trader learns is how to locate the right stock.
A time-proven and popular method is to look at the stocks and themes that are hot in the news. The trick, however, is not to trade these hot stocks, but to look for similar companies or complimentary industries.
The theory is that other stocks within the same industry or theme will soon follow.
While this is a standard stock-locating procedure for day traders, I like to apply it to the long term. As I've recently said in this article, real estate is hot right now. Prices are climbing across the globe and builders, real estate investment trusts and associated businesses are riding the wave higher.
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(Also read: "Why This Little-Known Company Bought 16,000 Homes.")
So when I was looking for stocks surrounding this hot sector, I realized building products would likely benefit from this boom. And no product is more widely used than wood, when it comes to construction.
This idea guided me to one of the world's largest lumber and wood product companies, Weyerhaeuser (NYSE: WY).
Not only is Weyerhaeuser a leading timber company, but it's also involved in real estate. In fact, the company closed on 764 new homes during the second quarter of 2012 alone. Its backlog of sold, but unclosed homes has ramped up more than 50% in the past year. This is the kind of smart diversification that distinguishes great companies from the merely good ones.
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After taking a quick look at the company's stock chart, I almost fell out of my chair. Weyerhaeuser has been in a solid uptrend since January 2012, when the price broke above the 50-day moving average. In fact, since this past August, the share price has soared more than 50% to more than $30 in a steady climb higher.
Take a look for yourself...
With this amazing performance and the underlying economic growth drivers, I had to take a closer look at this company. Here's what I discovered...
Weyerhaeuser harvests more than 6 million acres of wood-producing timberland. EBITDA for the timber business is calculated on a per-acre basis and the company's EBITDA comes in at $80 per acre, beating its competitors Rayonier (NYSE: RYN), at $56 per acre, and Plum Creek Timber (NYSE: PCL) at $37 per acre.
After the stellar share performance in 2012, all eyes were on the company's earnings released on Friday, Jan. 25. The earnings estimates had been steadily rising during the past month, from 16 cents a share to the present 19 cents. It turned out the company beat these estimates by a lot -- posting earnings of 26 cents a share in the fourth quarter of 2012, an incredible 116% increase from the year-ago quarter. Revenue for 2012 came in at $7.1 billion, a 14.5% increase from 2011.
Showing a vote of confidence, the company increased its quarterly dividend from 15 cents to 17 cents a share during the fourth quarter of 2012, creating a yield of a little more than 2%.
Risks to Consider: Weyerhaeuser is very connected to the economy, namely the building and real estate markets. I think the boom has started to reignite in the global building market, but no one knows for certain what the future holds.
Action to Take --> I really like this company as a fundamental and momentum play at the current level. My target price is $45 a share within the next 18 months.
-- David Goodboy
David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of WY in one or more of its "real money" portfolios.