Look Out Below! Could Lumber Stocks Go “Timber” From Here?

Is West Fraser Timber (TSX:WFG) a company that’s just in the right place at the right time — or is it a long-term winner?

| More on:

West Fraser Timber (TSX:WFG) is one of the largest North American lumber producers. Lumber prices continue to surge with increasing uncertainty over wood supplies. West Fraser stands as one of the key beneficiaries of this current environment.

Thus, there’s now a lot of attention being paid to these otherwise “boring” stocks. But has the momentum run out?

Let’s discuss.

What is happening?

West Fraser’s stock price appreciation this past year is absolutely incredible. Looking at the company’s long-term chart, this view becomes even more pronounced.

Seeing any stock nearly triple year over year is impressive. However, West Fraser is one of those stocks that just seems to be in the right place at the right time.

This isn’t a high-growth tech stock we’re talking about here. West Fraser is a lumber producer in what’s normally a low-margin, high-volume business. Lumber prices have absolutely skyrocketed of late due to a variety of supply/demand factors outside West Fraser’s control. Accordingly, this stock has taken off in rampant fashion.

The supply of lumber remains depressed due to shuttered capacity, largely tied to the pandemic. Pandemic-related restrictions have furthered the production capacity declines seen in existing mills. Furthermore, many mills were closed and companies planned for lower near-term demand. Anything but has materialized of late.

Record-low interest rates have caused a red-hot North American housing market to drive lumber demand through the roof. The economy is rebounding much faster than expected, and homes are being built at record levels, though not fast enough to keep up with demand. Additionally, bringing on additional supply has proven difficult, as companies aren’t able to flip a switch and add new mills or refurbish shuttered ones.

This paints a very rosy picture for this sector indeed.

Can timber prices correct?

As with all commodities, eventually prices rise to a level where new supply is forced into the market. Bringing on new mills may take time, but companies will invest if they see the profit motive to do so.

It appears the existing conditions for lumber prices are transitory. That is, unless one believes the housing market will remain this hot over the long term, or new supply won’t come onto the market, prices will have to drop. I see this situation as more likely than not.

For now, West Fraser stock remains in the limelight for investors. This company’s recent results show just how much lumber prices have bolstered the company’s bottom line.

I’m of the view that this particular bull market in lumber is likely reaching the point at which prices will have difficulty moving higher. That’s not to say they can’t. I just think it’s less likely than seeing a reversion to the mean.

Until that happens, West Fraser is a stock to be in. For now, I’m happy on the sidelines.

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 Chris MacDonald has no position in any of the stocks mentioned.

More on Investing

chart reflected in eyeglass lenses
Tech Stocks

Top Canadian AI Stocks to Watch in 2025

Celestica (TSX:CLS) stock and another Canadian AI stock are worth watching closely this holiday season.

Read more »

woman looks out at horizon
Investing

Is Sun Life Financial Stock a Buy for its 4% Dividend Yield?

Let's dive into whether Sun Life Financial (TSX:SLF) stock is a buy for its dividend yield alone, or if this…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

1 Magnificent Energy Stock Down 17% to Buy and Hold Forever

Down over 17% from all-time highs, Headwater Exploration is a TSX energy stock that offers you a tasty dividend yield…

Read more »

Man data analyze
Investing

Want $1 Million in Retirement? 2 Simple Index Funds to Buy and Hold for Decades

Just invest in a S&P 500 index fund and do nothing.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 21

Escalating geopolitical tensions and U.S. economic data remain on investors’ radar today as the TSX continues to hover above the…

Read more »

think thought consider
Investing

Should You Buy Couche-Tard Stock Aggressively Before Nov. 25?

Here’s what could help Couche-Tard stock rebound after its upcoming earnings event.

Read more »

calculate and analyze stock
Bank Stocks

4% Dividend Yield? I Keep Buying This Dividend Stock in Bulk!

If you find the perfect dividend stock, you never have to worry about investing again. And that's what you get…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Should You Buy the 3 Highest-Paying Dividend Stocks in Canada?

A few dividend stocks saw a sharp correction in November, increasing their yields. Are they a buy for high dividends?

Read more »