Top Canadian forestry stocks profit from U.S. growth

The U.S. economy is expected to grow by 2.5 per cent this year. That’s tied with Britain for the fastest economic growth of the Group of Seven industrial countries. With most Canadian exports going there, this bodes well for sales of forestry products and Canada’s top lumber producer stocks.

Sales of forestry products are notoriously volatile. Few forestry stocks consistently make money. An experienced investor told us, “I wouldn’t touch forest stocks with a 10-foot pole.”

There are times, however, when Canadian forestry stocks do well. This is likely one of those times. That’s partly because the U.S. economy is expected to grow by 2.5 per cent this year—tied with Britain for the fastest economic growth of the G7 (Group of Seven industrial countries). With a high proportion of our exports going south of the border, this can only assist forestry producers. So does a low loonie.

Canada’s trade agreements with the TPP (Trans Pacific Partnership), the European Union and South Korea should open up significant opportunities for Canadian forestry producers.

Lumber is better in earthquake-prone Asia

Until these agreements generate more trade, the U.S., China and Japan are likely to remain Canada’s top three markets for exports of forestry products.

Western Forest Products Inc. (TSX─WEF) says China and Japan are its “key markets”. It says Chinese urbanization has created a need to build 20 million new homes a year. Pacific Rim demand for lumber may rise since wood homes are safer than concrete buildings during earthquakes.

North American central banks have relied on low interest rates to stimulate the economy and create jobs. Low rates, of course, make housing more affordable. Even if the U.S. raises interest rates, as long as they remain low, we expect demand for housing in Canada, and particularly in the U.S., to remain brisk. This should increase the demand for lumber.

We expect some Canadian lumber producers to continue to do well–particularly with lower oil prices reducing production and shipping costs. That’s why we include lumber producers among our forestry stock to buy.

There are structural shifts working against paper producers. The Internet is displacing paper publications. Some have folded. Survivors are often available only online. Even when publications are printed, fewer copies reduce the amount of paper required. And there’s less paper-based advertising as advertisers increasingly migrate to the Internet.

Canadian producers face other problems. One is Canada’s aging plant and equipment. A second is the pine beetle that’s killing trees in Western Canada. So invest relatively little in forestry stocks.

If you want to diversify your portfolio, we rate four of 11 producers as ‘buys’. They are Acadian Timber (TSX─ADN), Domtar Corp. (TSX─UFS), West Fraser Timber (TSX─WFT) and Canfor Pulp Products (TSX─CFX). Just keep in mind that forestry stocks are often viewed by professional investors as trading buys, as opposed to buy-and-hold investments.

We’ve removed Weyco

We’ve removed U.S.-based Weyerhaeuser Company (NYSE─WY) from the forestry stocks that we regularly review in our paper and forest stocks survey.

Weyerhaeuser is a REIT (Real Estate Investment Trust). This makes it less comparable with standard forestry stocks. In 2015, for instance, the company’s operating margin is expected to hit 19.5 per cent—far higher than the others.

Weyerhaeuser remains a hold for growing dividends that currently yield an attractive 4.1 per cent. It also remains a hold for long-term share price gains.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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