The Motley Fool

Lumber – Supercycle or Not?

After years of being completely ignored, the lumber/forestry sector has been top of mind for many investors of late.  Thanks to a bottom being found in U.S. housing, and a potential recovery underway, this sector’s been hot.

This morning’s Globe and Mail however offers up a conflicting view of the industry’s future prospects.  In one article, a recently published bullish argument from a sell-side analyst is summarized.  In another, one of this country’s most respected financial companies is reducing its exposure.  What’s going on?

Sell-side

Over the past 10-years or so, analysts that cover the forestry industry have been run through the wringer.  The record rise and fall of the U.S. housing market caused these analysts to go from being highly sought out, to completely ignored.

Now that the industry is rebounding, their opinions are once again registering with investors.  RBC’s forestry analyst believes that the industry (and therefore his opinion) is now in the formative stages of a “supercycle”.

A combination of buoyant U.S. housing and demand from China, paired with a supply-base that has been decimated by the mountain pine beetle throughout Western North America means companies like West Fraser Timber (TSX:WFT) and Canfor (TSX:CFP) are set to cash-in over the next several years.

The problem I have with this argument is that the stocks of these two companies, as well as their industry peers, have already had massive moves.  Over the past year alone, WFT and CFP have climbed by 66% and 56% respectively and this has left their valuations perched at a historic high.  For these stocks to continue to appreciate, there is seemingly no other option than the emergence of this “supercycle”.

Brookfield

And it seems like Brookfield Asset Management (TSX:BAM.A,NYSE:BAM) agrees.

This morning it was announced that BAM and its affiliated Brookfield Infrastructure Partners L.P. (TSX:BIP.UN) have agreed to sell a combined $3.7 billion worth of forestry related assets.  In one part of the deal, Weyerhaeuser is acquiring 645,000 acres of U.S. Pacific North West timberlands for a price of $2.6 billion from BAM.  In the other, KapStone Paper and Packaging Corp. is acquiring a paper mill and seven U.S. Pacific North West container plants from BIP.

Timberland assets in particular are rare, and to see them being sold by a savy player such as Brookfield indicates the valuation being paid is probably very full.  From Brookfield’s standpoint, future returns from these assets are likely to be exceeded by other opportunities in the market.

Foolish Takeaway

So who’s right?  We won’t know for some time, however, my bet is on the player with real skin in the game.  Analysts have a variety of reasons for arriving at a specific conclusion.  Brookfield has just one.  Make money.  Be like Brookfield.  Be wary of valuation if you’re looking to wade into this space.

Forestry was a beaten down resource for many years that is now surging.  We have created a special FREE report that outlines a currently neglected resource that is poised to experience a similar resurgence.  To receive “Fuel Your Portfolio With This Energetic Commodity” simply click here and we’ll send you the report, absolutely free!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.