Inflation has flared up in 2021. With the economy reopening, there’s a wave of pent-up demand being unleashed. Meanwhile, central bankers keep printing more currency to fuel price hikes. The combination of record-high demand and loose monetary policies is pushing the price of raw materials upward.
The price of lumber has moved particularly aggressively. Each board foot of lumber has climbed from US$340 to US$1,600 over the past year. That’s the sharpest climb in recent history.
Higher lumber prices make home building and renovations more expensive. It should also benefit Canadian loggers who produce the increasingly valuable lumber. Here are the top two stocks you should consider if you’re looking to gain exposure to this trend.
Lumber stock #1
West Fraser Timber (TSX:WFG) is a Vancouver-based forestry company. The company produces lumber, plywood, pulp, newsprint, and wood chips. Shares have surged 26.4% since the start of this year and 166% since last year. Despite the run up, the stock still trades at a price-to-earnings ratio of 5.5.
Unsurprisingly, the surge in lumber prices has helped the company’s top line expand. In its most recent quarter, sales increased 86% year on year to $2.3 billion. Earnings before taxes, depreciation, interest, and amortization were roughly $1 billion in this quarter.
If demand for housing and renovations remains elevated across North America, West Fraser could see further upside. Investors should expect higher sales and better dividends if this trend is sustained.
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Lumber stock #2
Canfor (CFP) is yet another lumber proxy investors could consider. Condor is a diversified forestry company that produces lumber and offers sustainable wood-building solutions. Production facilities are spread across North America, but primarily based in British Columbia and the southern United States.
Like West Fraser, Canfor tore through records in its most recent quarter. Sales were up 66% to $1.94 billion in Q1 2021. The company’s bottom line also improved dramatically. Canfor swung from a $70 million loss in Q1 2019 to $428 million in profits this quarter.
Unsurprisingly, the stock is up 263% over the past year. Despite the surge, Canfor stock trades at a price-to-earnings ratio of four. If lumber prices remain elevated throughput 2021, this stock could have further upside.
A word of caution
We haven’t seen inflation rise this high in over a decade. Investors and consumers should brace for higher costs of living in 2021. However, economists believe this inflation cycle is temporary.
The pent-up demand and base effects from 2020 won’t be sustained forever. Eventually, consumers will run out of discretionary savings and production will catch up. That means the price of lumber, along with other commodities, could decline sharply by the end of the year.
This could be the reason why these lumber stocks are trading at low multiples. Savvy investors probably see a correction ahead. Brookfield Asset Management, for instance, recently sold its stake in West Fraser. That could be a red flag for investors in this arena. Stay cautious.
Inflation is up, which means the price of raw materials like lumber is surging. Stocks like Canfor and West Fraser could be the best proxies for investors.
Looking for more quality stocks? Here's a list.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV.