Tree hugging may be good for you; but owning them?

Most forest stocks should do better in 2016. The U.S. and British economies are growing the fastest of the Group of Seven industrial countries. With so many exports going there, forest stocks’ sales, profits and share prices should get a lift. The Canadian and Chinese economies are also doing better than expected.

Forest fires burned down part of Fort McMurray, Alberta. Its anticipated rebuilding drove up forestry stocks. Our view, however, is that Fort McMurray is just too small to have much impact on international lumber prices.

Still, the American, British, Canadian and Chinese economies are performing relatively well. All but three of the dozen forest stocks we analyze are expected to earn more or lose less in 2016. Higher company earnings, in turn, should give a lift to their share prices.

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

The international economy matters most

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

Buy-rated Western Forest Products 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 in Asian earthquakes than concrete buildings.

North American policy makers are relying on very low interest rates to stimulate the economy and reduce unemployment. Low interest rates, of course, also make housing more affordable. As long as interest rates remain low, we expect demand for housing in both Canada and the U.S. to remain brisk. This, in turn, should increase the demand for lumber.

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

Structural shifts work against paper. The Internet is hurting paper publications. Some have folded. Survivors are often available only online. Even when publications are printed, fewer copies reduce the amount of paper needed, especially as there’s less paper-based advertising.

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 temper your enthusiasm for forestry stocks. An experienced and successful investor told us: “I wouldn’t touch forest stocks with a 10-foot pole.”

If you want to diversify your portfolio, we rate six of a dozen producers ‘buys’. They’re mostly lumber producers. Just remember that forestry stocks are often seen as trading buys as opposed to buy-and-hold investments.

The Investment Reporter rates three lumber and pulp and paper producers with large assets as buys. They are: Cascades Inc. (TSX─CAS), Domtar Corp. (TSX─UFS) and West Fraser Timber (TSX─WFT).

Among companies with smaller assets, The Investment Reporter rates lumber producers Acadian Timber (TSX─ADN) and Western Forest Products (TSX─WEF) and pulp and paper producer Canfor Pulp Products (TSX─CFX) as buys.

 

The Investment Reporter, MPL Communications Inc.
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