West Fraser Timber (WFG.TO)

(Market Call Minute.) He really likes the home building industry in the US, and the materials that go into home building.

It is experiencing a cup and handle, or a rounded bottom. It is a smooth transition from a downward transition to an uptrend. The most important part is that it was a rounded approach. There is resistance at this point. If it gets thought it, it looks pretty good.

It is the biggest in Canada and the second biggest in the US after Weyerhaeuser (WY-N). Over the years they now have over 43% of their productive assets in the US. They have a 6.7 price to cash flow ratio and a great balance sheet. As the forth largest city in the US gets rebuilt they will be needed. (Analysts’ target: $70.50).

Lumber stocks have had a good run. SPF prices have gone to $375, which is absolutely insane. Most analysts are factoring in $300 lumber prices, so a $375 lumber price means there is going to be a lot of upward revision which would potentially be positive for this company. He has avoided the space because of the uncertainty around the softwood lumber agreement. It is hard to get a handle on how that is going to shake out, especially with the Trump administration. There is also the potential of some negative backlash from the border adjustment tax. Until there is clarity, this is a space he wants to avoid for the time being. This is a very good company. The largest lumber producer in North America and have very good assets. However, their assets are primarily located in Canada. You could consider Interfor (IFP-T) whose majority of sawmills are in the US and they sell domestically. It could also be a take-out candidate given its size and its ideal positioning in the US south east.

Still a little concerned on software lumber. When Donald Trump takes office, he thinks he is looking to negate a couple of trade deals, and this is probably the easiest one to step on.

This has exceptional seasonality in a different way, both on the upside from the middle of October until April, and the downside from April until October. This year has been a little different because of what is happening with the softwood lumber agreement. The agreement is up in the air and we don’t know what is going to happen. He would want to see the results of the agreement before making any recommendation.

Had owned this as a play on US housing, until he discovered just how much of the US housing is not wood, but concrete. A high-quality company, so if you are going to make that bet, it is probably the best pick. There is an ongoing softwood lumber issue which has some implications, and generates some uncertainty. Also, the US has gotten really good at growing their own timber and meeting the demands themselves.

He is a little concerned on lumber stocks. It looks again like they are not getting a deal with the US on softwood. That’s a bit of a problem. Housing starts in the US looks fine, and the Cdn$ down is more of a positive. They just reported, and had bad numbers, but it wasn’t on the lumber side, it was more on the pulp operations.

He likes timber stocks. Doesn’t own this, but it is certainly showing up on his screens at these levels. Housing cycles tend to be very long, and we have had a very good one since 2008. This stock is worth a good look at these prices.

Forest products in Canada have double seasonality. From early March to beginning of October they move lower. Buy then.

The stock looks quite good here. The only thing you need to concern yourself with is when it comes across areas where it has gone up and then come back down and then got stuck back up there again. It is now in an area where it has had problems getting through. If you were putting a Stop on this, it would be at $40.

Forestry? His go to name in this sector is always this one. When he looked at it this winter, it wasn’t cheap enough. It’s all right on Fair Market Value and will make lots of money over the next couple of years when the US housing market recovers.

(Market Call Minute.) Lumber stocks have lagged a little, and with US housing looking better, he would say this is a Buy on weakness.

A good company. With a lot of stocks in the commodity area, timing is very, very key when you are buying. Over the last 5 years, this has done quite well as we have gone from very depressed lumber prices to very good prices. With the slight pull down in China and Chinese growth, exports into China have slowed down. He expects we get back into rising prices a year from now. Likes the stock at this point.

When looking at the timber sector, you want to look at some corollary investment that moves along with it. In this case, you want to track the housing sector, and if that is not doing well, timber stocks tend to not do well. Housing has not done well. We are getting late in the trade for this. Chart is showing a little bit of support, but it may be a dead cat bounce. Not something he would be entering into.