I grew up (and still live) in the Deep South. I’ve also been managing money for the very wealthy for nearly two decades. One of the first things I learned about wealth in this region is that a lot of it was created by forestry and timber many generations ago. 

#-ad_banner-#The seemingly bottomless bowl of money that was created when someone’s great- great-grandfather managed to buy timberland when it was a dime an acre never ceases to amaze me. 

So when I discovered a stock that could help investors grow their wealth like an Alabama timber baron, I paid attention.

CatchMark Timber Trust (NYSE: CTT) is a pure-play timber REIT (real estate investment trust) that owns, harvests and manages timber. The company currently owns interests in about 320,400 acres of timberland located in Alabama, Georgia, and Texas. 

CatchMark went public in January of this year and recently conducted a secondary offering using the proceeds to extinguish debt and purchase additional acreage which has increased by 36% since year end 2013.

CTT data by YCharts

Since its debut, CatchMark shares have chugged sideways until the secondary offering, which appears to have put some pressure on the stock. Most likely, the market fears dilution. Luckily for value investors, the market’s fear has created opportunity.

Out of the gate, CatchMark has raised its quarterly dividend 14% in its first year operating as a public entity, to $0.125 per quarter. This translates to a 3.7% yield. While that may seem a bit weak compared with other REITs, CatchMark is truly a growth story.

Forestry-related stocks live and die by the health of the homebuilding market — or at least, that’s what the pundits would like us to believe. The U.S. housing market, while showing marked signs of improvement, is still sluggish and could well take a decade or longer to return to pre-crash levels. But keep in mind that while selling lumber is important to the timber industry, two-by-fours are not its only source of revenue.

The U.S. housing industry is recovering, but CatchMark isn’t putting all of eggs in one basket. By volume, 58% of the company’s timber is used for pulpwood (paper making) while 42% is used for lumber. This means that over half of Catchmark’s annual revenue comes from a high-volume, quick-turnaround stream. While CatchMark is positioned for a housing recovery, it’s not hitching its wagon to one industry.

And revenues have been growing. CatchMark is expected to turn in revenue numbers of $43 million for 2014 versus 2013 results of $32 million; an increase of 34%. 2015 revenues are expected to grow by better than 9% coming in at $47 million.

Also, the company’s balance sheet is in great shape. CatchMark’s long-term debt-to-capital ratio stands at 11%, well below the industry average of around 25%.

However, CatchMark’s true potential lies in its valuation, or lack thereof.  CatchMark shares trade at around $12.30. This values the company at around $1,477 per acre for mature timber. Timberland in the southeastern U.S. currently fetches around $1,700 an acre. This puts the value of CatchMark’s timber acreage at around $533 million. The current market cap of the company comes in at $326 million — a discount of nearly 40%.  

Risks to Consider: While housing is staging something of a comeback, it’s nowhere near the peaks of the past decade, and lumber demand and pricing are still relatively soft.

Action to Take –> Bottom line: This is a great asset trading at an attractive discount.

Although it’s a relatively young entity, CatchMark’s structure, strategy and results have been impressive. Combined with the 3.7% dividend yield, my 12- to 18-month price target of $15.50 represents a potential total return of near 30%.