20 July, 2022

Morning Report: Lumbering through the forest of bears

On June 24th, we highlighted insider buying at Interfor (Sunny; IFP). At the time, Jerome Powell appeared to be talking down the prospects for the economy which, we suggested, was part of the Fed's strategy to cool down inflation expectations. The Fed succeeded in building a bearish narrative in the markets, and stocks struggled into early July. As bearish sentiment built over the past month, we had forest products in focus as insider activity in the group was not consistent with a gloomy market narrative.

On that front, on Tuesday, a Reuters story surfaced that wood panel manufacturer Kronospan and private equity firm CVC Capital Partners were interested in potentially acquiring West Fraser Timber (WFG) which we last highlighted here on June 21st. At the time, we noted that the stock was benefiting from earnings growth and some medium-term growth trends. The Tuesday news story lifted forest product stocks across the board and may have helped to turn the tide from extreme bearish sentiment in the resource area to something more balanced. In response, West Fraser Timber issued a press release the same day clarifying that while it has met with Kronospan and CVC Capital Partners, it has yet to receive a proposal, and there are no ongoing discussions about the terms of any transaction. West Fraser remarked that it remains focused on executing its business strategy to create shareholder value. We have not seen any officer and director buying at West Fraser over the past few weeks, but the company has bought back $76 million worth of shares since we last reported on it. Q2 results are expected on July 28th. Meanwhile, we will keep an eye on the forest products area to see if it can form the basis for a summer stock market recovery.