Industry on the rebound: Seeking growth among forestry stocks

The Globe and Mail, Number Cruncher

By Peter Ashton

January 18, 2019

In The Globe And Mail, Peter Ashton uses Strategy Builder to find Canadian forestry stocks with strong fundamentals and recent price momentum.

What are we looking for?

Most wood products and forestry stocks performed well for Canadian investors in recent years, driven by a strong U.S. housing sector and demand for building products. Red-hot demand for Canadian wood products pushed many forestry stocks to new highs in early 2018. However, falling lumber prices and signs of a slowing U.S. housing market began to take their toll in mid-2018, creating a perfect storm of disappointments for this industry. However, these stocks may have found a bottom in late December and have recovered well over the subsequent weeks. In fact, the forestry and wood products industry is one of the TSX’s best performing industries over the past month, up 10.8 per cent. Can we find Canadian forestry and wood products companies with attractive valuations, solid balance sheets and strong price momentum?

 

The screen

We will be using Trading Central Strategy Builder to search for Canadian forestry stocks with reasonable valuations, growing earnings, low debt and strong upward price momentum in the past month.

We will start by screening for Canadian forestry and wood products stocks with a market capitalization of $100-million or more. To find stocks with attractive valuations, we will filter for trailing price-to-earnings ratios of 17 or less. Note that the aver-age P/E ratio for Canadian forest-ry stocks is a meagre 7.5, indicating the deep value to be found in this industry.

To find forestry stocks with strong balance sheets, we will screen for companies with low debt-to-equity ratios (0.75 or less) as well as quarterly earnings growth of at least 3 per cent. Last, to focus on companies demonstrating strong upward price momentum, we will filter for stocks whose prices have in-creased by 5 per cent or more in the past four weeks.

 

What did we find?

Topping our list is diversified wood products firm West Fraser Timber Co. Ltd. The company has a very low trailing P/E ratio of just 5.4 owing in part to its 25-per-cent price drop in the second half of 2018. The company delivered strong third-quarter results in October with a 95-per-cent increase in earnings com-pared with the same quarter a year ago.

No company on our list suffered more in 2018 than Canfor Corp. After hitting a 52-week high in July, 2018, Canfor stock went on to drop 47 per cent in the second half of the year. The company’s P/E ratio sits at just 4, well below its industry peers. After reporting very strong results in October, Canfor has now start-ed to rally – up 6.1 per cent in the past four weeks.

One of the best performers on our list over the past four weeks has been Interfor Corp., up 10.2 per cent. Despite delivering strong third-quarter results in October, some analysts worried that increasing U.S. softwood duties and would affect the company’s future profitability. The stock declined to a 52-week low on Dec. 17. Investors seem to have shrugged off these concerns in recent weeks and Interfor stock has rallied strongly in late December and early January.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

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