Sometimes, trading and investing don’t need to be overly complicated. For example, lumber prices have doubled so far in 2021 and are up over 300% from last year.
With lumber demand expected to remain steady in the coming months, companies that are involved in producing this commodity could see strong earnings and deliver outsized returns to investors as a result.
Keep in mind that in simple terms, there is far more demand than supply for this commodity right now. The pandemic caused mills to cut back on lumber production in anticipation of a housing slump.
Then, the Federal Reserve lowered interest rates. With mortgage rates at historic lows, people decided to take advantage and start looking for new homes away from big cities. This resulted in a housing market boom that has sent the price of lumber through the roof.
While this trend won’t last forever, it is certainly going to benefit lumber stocks this year and perhaps for even longer. That's why we've put together a list of 3 lumber stocks to consider adding on dips.
1. West Fraser Timber
First up is West Fraser Timber (NYSE:WFG), a diversified wood products company with more than 60 facilities in Canada, the United States, the United Kingdom, and Europe. As a company that produces things like lumber, laminated veneer lumber, medium-density fiberboard, plywood, pulp, wood chips, and more, it offers investors the perfect opportunity to gain exposure to the timber products that are used in the housing market.
Most of West Fraser Timber’s products are used in home construction, repair and remodeling, and industrial applications, which means this company is nicely poised to continue benefitting from a red hot real estate market.
If West Fraser Timber’s Q1 earnings are any indication, it is clearly capitalizing on rising lumber prices. The company reported that Q1 sales increased by 81% from the prior quarter to $2.3 billion and saw its Adjusted EBITDA more than double from the prior quarter to reach $1 billion.
The bottom line is that the U.S. will continue looking to import lumber from Canada to deal with the heavy demand, which is why West Fraser Timber is a great stock to consider adding on dips.
2. Weyerhaeuser
Adding shares of one of the world’s largest integrated forest products companies like Weyerhaeuser could be a savvy move at this time given the lumber shortages, especially since it manages more than 20 million acres of forest land.
Weyerhaeuser (NYSE:WY) is primarily engaged in the growing and harvesting of timber, as well as producing and distributing wood and paper products. The company’s wood products segment produces softwood and hardwood lumber, plywood and veneer, composite panels, and engineered lumber, and roughly 70% of these products are used in new residential construction.
Weyerhaeuser recently reported Q1 net earnings of $681 million, or $0.91 per diluted share, which was up over 354% from the $150 million in net earnings a year ago. It’s also worth mentioning that the company reported its highest quarterly Adjusted EBITDA on record at $1.1 billion in Q1.
This is another strong business that is benefitting from residential construction activity and momentum with repairing and remodeling homes, which means it’s a great buy-the-dip candidate to consider.
3. iShares Global Timber & Forestry ETF
If you are interested in playing the global timber industry but aren’t comfortable investing in individual companies, iShares Global Timber & Forestry ETF (NASDAQ:WOOD) is a fantastic alternative. It offers exposure to companies that produce forest products, agricultural products, and paper and packaging products.
With 25 holdings including quality names like West Fraser Timber, Weyerhaeuser, and Potlatchdeltic Corp, adding shares of this ETF on the dip is a great way to gain exposure to lumber.
It's important to remember that timber can be used as a hedge for inflation, which is yet another reason to consider adding iShares Global Timber & Forestry ETF to your shopping list.
You can also earn some extra income for your portfolio thanks to its 0.85% dividend yield. This ETF is up over 21% year-to-date and offers one of the safest ways to gain portfolio exposure to lumber at this time.