Investors who are looking for evidence of “transient” inflation may point to the lumber industry. In 2020 and the first five months of 2021, lumber prices increased dramatically. This was a straightforward case of a supply-demand imbalance.
Timber companies had to work through labor restrictions due to the novel coronavirus. To emphasize that point, in April 2020 which was the time of the most encompassing restrictions in the United States, almost 40% of North American sawmill capacity was closed.
And this was at a time when more Americans were sheltering in place and deciding it was time to do some home improvement. This led to lumber prices that increased much faster than the rate of inflation. And that was good news for investors who jumped aboard lumber stocks.
Nearly 16 months later, lumber prices are starting to retreat. But demand remains strong, so the opportunity for investors will remain strong.
With that in mind, here are three lumber stocks you should be looking at even as lumber prices begin to fall.
1. Weyerhaeuser
Weyerhaeuser (NYSE:WY) is an exceptional choice for retail investors seeking exposure to the timber industry. The company is a timber real estate investment trust (REIT) and it operates in the same fashion as a REIT that owns a shopping mall or apartment complex. That is, they collect rent from the companies that use their properties.
Weyerhaeuser is the largest timber REIT with 14 million acres under management. Plus, the company has an additional 12.4 million acres that they own and operate. This is beneficial to investors because the company makes money on both ends of the timber trade.
The consensus opinion of analysts could lead you to believe that most of the growth is gone. And to be fair, although WY stock is up over 53% in the 12 months, it is only up about 6% in 2021. However, Raymond James recently projected that the company will generate about $3.7 billion in profits in 2021 which would be a 16% increase to the firm’s previous estimates.
2. Boise Cascad
If Weyerhaeuser represents the more value end of the lumber trade, Boise Cascad (NYSE:BCC) is definitely geared toward the growth side. This small-cap company makes the increasingly popular engineered wood products (EWP). This category includes products such as particle board, heavy-load bearing joists, and flexible beams to name a few.
Prior to the pandemic-fueled lumber bubble, EWP products were afforded a higher margin (typically around 7-9%). However, at times of high demand, the margin has increased aa well. For all of last year, Boise Cascade averaged a 15% margin. And that increased to 19% in the first quarter of 2021.
Even if the company can’t sustain those high margins, the fact that it focuses on selling direct to contractors should be a strong catalysts as the home building market remains strong.
Despite dropping over 11% in the last 30 days, BCC stock is still up nearly 20% in 2021. And if investors are looking for another reason to own the stock, consider the $1.90 increase to the company’s dividend that it issued in June 2021.
3. Rayonier
Another timer REIT to consider is Rayonier (NYSE:RYN). However, the reason why Rayonier makes this list is due to its business model. Rayonier does not have the same scale as Weyerhaeuser it makes up for it in the way it uses the land it owns.
Specifically, the company not only collects fees from logging operations, but they generate revenue from other areas such as gas and oil drilling leases. As the oil sector continues to show robust growth that will likely be a catalyst for Rayonier for the rest of 2021.
The strength of the company’s business model may be revealing itself as lumber prices fall. In the past 30 days, RYN stock has climbed over 4%. And for all of 2021, the stock is up over 30%. Plus investors collect a dividend that currently has a 2.85% yield.