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The $123,400 Mistake

George C. Fisher

I believe I need to make a disclosures right up front: I own 209.8 shares of Pope Resources LP that I acquired in Jan ‘03, Jan ‘04 and May ’04 (the fractional share is from my broker sponsored dividend reinvestment program). What follows is a detailed saga of some sad sack investors who may not have known the difference between a “market order” and a “limit order”. Not knowing the difference may have cost them $123,000 on the purchase of 5,750 shares of stock.

I love timber companies. I am quite fond of their steady dividend payout, consistency in earnings, and the longevity of their asset base. While their revenues and profits are tied to the cyclicality of commodity lumber prices, going back over 75 years timber assets have appreciated approximately 17 percent a year. There are very few publicly-traded timber companies. While many large forest companies own timberlands, pure timber plays are few and far between. I own a few different timber companies including TimberWest (TWF.UN), Rayonier (RYN), Plum Creek Timber (PCL), and Pope Resources (POPEZ). Pope Resources is the most recent to be added to my list of long-term timber holdings, at a time when I thought its unit price was grossly undervalued. In today’s market, most timber stocks, Pope Resources included, are trading at their fair value on a yield and valuation basis.

Pope Resources LP (POPEZ) is a timber company headquartered in Poulsbo, Washington and has a rich corporate history dating back nearly 150 years. POPEZ was spun-off during a restructuring of forest products firm Pope and Talbot (POP) in 1991 and represents timberlands, nurseries and timber management services. POPEZ is a master limited partnership (MLP) and operates three business segments: Fee Timber, Timberland Management and Consulting, and Real Estate. Fee Timber operations consist of the growing and harvesting timber. Timberland Management and Consulting provides timberland management and forestry consulting services to third-party owners of timberlands. Real Estate operations increase the value of the Company's land investments by obtaining the entitlements necessary to make value-added development possible. Pope Resources owns nearly 112,000 acres of timberland and 2,600 acres of real estate held for development. In addition, the company recently signed a multi-year timberland management contract to oversee the sustainable harvest of 522,000 acres of timberland in Washington and Oregon. This contract is of significance not only for its large size, but also it represents the first new timber management business in some time. I hope this signals a long-awaited turnaround in the timberland management segment.

Pope Resources had a banner year. Net income rose from $3.5 million or $0.78 per unit (MLPs use units rather than share designations) in 2003 to $10.2 million or $2.22 per unit in 2004. Revenues jumped from $27.0 million in 2003 to $39.6 million in 2004. Driving income and revenue figures higher was a strong timber market along with timberland acquisitions that led to elevated harvest volumes. Not only did log harvest volumes increase by 34 percent in 2004, the realized commodity price of logs increased by 11 percent. Land sales aided in juicing up 2004 earnings. POPEZ sold $4.5 million in property, booking income of $1.6 million or $0.36 a unit.

By most all measures, POPEZ is a mini micro-cap stock and is not officially listed on any of the big three exchanges, NYSE, AMEX and NASDQ National, but trades within the NASDQ system. Total market capitalization for POPEZ as of Feb 4, 2005 was $163 million. The company has a small number of units outstanding, currently at 4.5 million units, of which 20 percent is held by insiders and company management. This leaves an effective float available for daily trading of around 3.6 million units. Institutional investors and mutual funds own an additional 40 percent, with Private Management Capital owning about 1.4 million shares, or 31 percent. Assuming management and mutual funds are in this for the long-term, this leaves a minuscule 1.8 million unit float to be traded by individual investors like you and me.

POPEZ’s unit price has risen steadily from a low of around $10 in the period from Sept 2002 to March 2003, and had trade up to the $25 range as of the end of last month. Three-month average daily volume is a mere 2,680 units, with relatively high volume days amounting to between 4,000 and 8,000 units traded. A great number of days, volume was a just few hundred units or there was no trading at all. In addition, there is no major brokerage analyst review of POPEZ. Pope Resources is an under followed, mini micro-cap company for sure.

Compare these numbers to Plum Creek Timber (PCL), the largest publicly-traded timber firm. PCL’s market cap is $6.8 billion, has a float of 182 million shares and average daily volume of 604,000 shares. Plum Creek Timber owns a bit more than 8 million acres of timber and is followed by several top Wall Street brokerage firms.

On Friday Jan 28, POPEZ traded 14,000 units. This caught my attention as it is almost 5 times the average volume. The stock also moved up nicely from $23.10 to $25.50, for a 12 percent gain on the day. This really peaked my interest as my history with POPEZ was slow but steady price changes. By reviewing daily price history provided on finance.yahoo.com, I discovered that on only about 13 trading days over the past 2 years did POPEZ trade over 8,000 units, and the price movement was usually within a $0.50 range. So, 14,000 units and a $2.40 per unit rise were indeed intriguing. I vowed to closely watch the unit’s action over the next few days.

On Monday, Jan 31, Pope Resources announced fourth quarter and full year 2004 results, and they were very positive. Monday’s volume saw 48,000 units trade hands and a closing price of $27.75; Tuesday Feb 1 there was 6,100 units traded and a closing price of $28.50; and on Wed Feb 2 there were again 14,800 units traded with a closing price of $28.69. Over the course of four trading days, a total of 82,000 units changed hands, or 8 times a “normal” four day trading period. The price had risen 25 percent to valuations not seen since the late 1990s.

Something was going on, and I was sitting on the edge of my desk chair, chomping at the bit, ready to see what was next.

Thursday morning Feb 3 saw a very bizarre event. I logged on the Internet at about 11:00. POPEZ had already traded 100,000 units, the opening price was $51.75 and 5,750 units had traded at $56.85.

$56.85 per unit and 100,000 units traded – wow. Something was going on. The two things that came to mind was a potential buyout or, finally, a major brokerage recommendation. As the day progressed, volume continued to tick up and trade prices began to crumble. The closing price on Thursday was $35.38, up $6.69 or 23 percent for the day, on total volume of 164,000 units.

I was on a mission to figure out what was happening. There was no new company news, so I started to explore the message boards to see what the Internet chatter might disclose. While I do not obtain my stock selections from message board touts, they sometimes can be an interesting source of information, taken, of course, with a grain of salt.

There was my answer.

After the close on Wed Feb 2, an investment newsletter recommended Pope Resources for purchase. According to the message boards, a newsletter subscriber claims POPEZ recommended price limit for purchase was set at $31 a unit. This recommendation seems to be the cause of the recent attention in POPEZ.

Here comes my conjecture. I believe some novice investors liked what they read Wed night and placed a “market order” to purchase POPEZ at the market’s open Thursday morning.

According to the Securities and Exchange Commission website, “A market order is an order to buy or sell a stock at the current market price. The advantage of a market order is you are almost always guaranteed your order will be executed (as long as there are willing buyers and sellers). The disadvantage is the price you pay when your order is executed may not always be the price you obtained from a real-time quote service or were quoted by your broker. This may be especially true in fast-moving markets where stock prices are more volatile. When you place a market order, you can't control the price at which your order will be filled. To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.” More information on market and limit orders can be found at www.sec.gov/answers/limit.htm.

I believe these potentially novice investors may have not known that by placing a “market order”, they were effectively saying that the sky is the limit (no pun intended). Market orders effectively communicate that the buyers are willing to pay any market price. In the case of POPEZ on Feb 3, initial buyers with market orders at the open were filled at very high prices because there were not enough sellers, or at least no enough sellers below a hugely inflated value.

It is a classic illustration of more buyers than sellers (about 57 times the normal buyers to be more accurate), not enough shares to satisfy demand due to a small float, and buyers utilizing “the sky’s the limit” order placement.

I conjecture this is the case because more experienced investors would have researched sufficiently to know of the potential financial dangers of a market order in a very thinly traded mini micro-cap stock. I very rarely use market orders as I want to be in control of the prices I pay for my investments. If I want to make sure I get filled in a purchase, I may offer to pay a few pennies more than the last trade. I never, never place any market orders when the market is closed, as who knows what tomorrow initial trading will bring. The only exception is my optional cash contributions to my DRIP accounts, but that is another story for another day.

At a PE ratio of approximately 15 and a price of $36, Pope Resources is no longer a screaming bargain. If investors are seeking to add timber companies, I would carefully review and compare the fundamentals and prospects of all the major, and minor, players. When you invest in a mini micro-cap stock, make sure you control the transaction price through limit orders.

For the week ending Feb 4, Pope Resources was the fourth biggest gainer in the NASDQ system with a close of $36.40, up 42.8% on weekly volume of 265,200 units. However, the sad sack investors who bought 5,750 units of Pope Resources at the early inter-day high on February 3, 2004 paid a total of $326,900. These same units at the close of the day had a value of $203,500, creating a horrific $123,400 single day loss.

An expensive lesson for them, but a darn good illustration for the rest of us.

George C. Fisher is a 30-year veteran in DSP/DRIP investing. He is author of All About DRIPs and DSPs (McGraw Hill, 2001) and The StreetSmart Guide to Overlooked Stocks (McGraw Hill, 2002). Mr. Fisher is an avid dividend reinvestment advocate and utilizes the strategy with all dividend paying stocks, both at the broker and direct with the companies using their DRIP programs.