Did you know that burning wood is climate-neutral?! The carbon dioxide released is balanced by the trees themselves - as part of what they pulled out of the air to grow. Thus, it is likely that the demand for wood will rise again. This makes wood a really interesting product for every investor. So Obermatt CEO Dr. Hermann J. Stern was all the more surprised to find four timber companies with both excellent Obermatt Value and Combined Ranks.
was actually looking for commodity stocks in our Obermatt rank database (the CSV file that Obermatt Premium subscribers receive), because gold stocks are a hedge in times of looming recessions like now when he came across these lumber companies. Dr. Stern thinks they could be more stable in a downturn. The Motley Fool forum also discusses West Fraser and Canfort as investment options to hedge against recessions. So how is it possible to buy these companies so cheap? Especially West Fraser, where the company also has such a good Growth Rank! Because we remember from the previous videos: A low price goes hand in hand with a high Value Rank, but also with a difficult future. Why should West Fraser currently have a difficult future?
The reason for this appears to be, among other things, US import taxes. The Americans want to levy taxes on imported wood from Canada. In addition, there is less and less wood in Canada that can still be processed. In October 2018 the news reported that West Fraser was announcing production reductions in British Columbia. The company also announced that "2018 was a challenging year for West Fraser. Poor weather conditions and transportation difficulties early in 2018 impacted production and shipments which caused extreme volatility in lumber price and order patterns."
However, this pressure situation also had a positive effect: The timber companies decided to expand overseas: In November 2018, West Fraser announced a major takeover in the USA (300 million US dollars), whereby the growing export markets for sawn timber now include Asia, the Caribbean, Europe as well as the Middle East and South America.
How long-term are the current problems anyway? Customs duties may disappear again. Americans don’t see Canadians as the enemy. Many of the new levies have already been eliminated by even more recent agreements. Also, timber prices could recover again; particularly if the burning of wood becomes cheaper by the climate neutrality mentioned.
Dr. Stern's next step was to find out how cheap these companies really are - he researched Reuters for this: West Fraser has a price-earnings ratio (P/E ratio) of 9. This means that the profits amount to more than 10% of what you as an investor pay for this share. That is a very good value. Canfor has a ratio of 14 and is almost twice as expensive. Also, the company does not pay dividends. West Fraser still does. The company's dividend yield is on a sound Obermatt rank of 52. This corresponds to the market average.
For him, this is a good indication. He likes wood as a raw material. It may seem boring, but it is useful. Especially as a hedge against the recession. Since he doesn't have any such companies in my portfolio, he decides to buy West Fraser. This is my decision - he wishes you every success with yours.