Lumber stocks have taken a beating so far this year amid falling prices for the key construction commodity, but some investors see it as a buying opportunity, betting the U.S. housing market will bounce back and growth in Asia will remain steady.
Lumber prices are down about 20 per cent since late last year amid a slump in North American housing starts, due in part to severe winter weather that has slowed building activity, and weaker exports to China.
Canadian lumber stocks have also fallen by an average of about 20 per cent so far this year. The drop is prompting analysts and fund managers to take a harder look at the sector as a potential place to make profit in a market where many stocks are considered too expensive.
“We are very bullish on the sector. Stocks are off a lot from their peaks and we think the back half of 2015 will be very good,” said Raymond James analyst Daryl Swetlishoff, who has an “outperform” (similar to “buy”) on six of the eight forestry companies he covers.
“If you’re betting on a lumber stock, what you are betting on is a gradual improvement in the U.S. housing market. That’s what it comes down to. … It’s not an egregious bet to make.”
Prices for Western lumber two-by-fours produced from spruce, pine and fir have fallen to around $280 (U.S.) for 1,000 board feet, from $340 at the end of 2014.
U.S. housing starts plunged 17 per cent in February to 897,000 annualized units, down from about 1.08 million in January, which economists said was because of harsh weather across several regions of the country last month. Meanwhile, building permits were up three per cent to 1.09 million annualized units, which is seen as a promising sign for future activity.
Analysts say lumber prices could fall further in the coming weeks, but expect them to recover later this year on anticipated increases in both Chinese shipments and North American housing activity.
Mr. Swetlishoff is recommending investors take advantage of current market volatility to add to their positions in lumber stocks. He cites two companies in particular; Interfor Corp., because of its exposure to the strong southern U.S. market, and Western Forest Products Inc., for its larger exposure to markets in China and Japan. Both stocks are cheap right now after being hit hard in recent weeks, he said.
Interfor’s stock is down more than 15 per cent so far this year, while Western Forest Products is down about 30 per cent. Shares in Canfor Corp.have slipped 15 per cent, while West Fraser Timber Co. Ltd. stock is down about 9 per cent.
“This is a good level right now, from an investor point of view, to look at some of these names again,” said CIBC World Markets analyst Mark Kennedy. He said Canadian lumber producers are also benefiting from the lower Canadian dollar.
Mr. Kennedy has a “sector outperformer” (similar to “buy”) on Interfor and Canfor, as well as wood panel manufacturer Norbord Inc., which has proposed to buy Ainsworth Lumber Co. Ltd.
John Stephenson, chief executive at Stephenson & Co. Capital Management, doesn’t own forestry stocks right now but sees some opportunities, citing names such as Interfor and Western Forest Products for their unique market exposure and Norbord for its growth potential once the Ainsworth deal is done, which is expected to happen at the end of the month.
“We are at a point in time that it’s starting to look interesting,” Mr. Stephenson said of the sector.
Dundee Capital Markets has a “buy” on Canfor, Interfor and West Fraser, calling the recent selloff “a buying opportunity.” However, it has a “sell” on Norbord, citing oversupply in the wood panel market.