Cross-post w/IFP - choppy near term, followed by sig. upside Phone-typed so that's driving the tedious length (it got away from me), lack of structure, and typos. Mostly a general take. If I get a chance to be RFP specific I'd add I'm thrilled by the Duncan Davis impact so far -- I suspect that was the catalyst for finally walking away form a sierally unfortable Calhoun mill. There is likely latent upside if they report reasonble risk hedging in Q1 -- it was ugly in 2021 where they managed to lose money (opp cost) on blown hedging both on the way up and the way down. Just being neutral is a win I think. Pulp should be a bright spot too -- I see the China futures are at 6180 RMB, and my very rough take is that the grim breakeven only threshold was ~4500 or so. Directionally that level, if it holds, should be 20-30% pulp ebitda margins -- so upward of a "bonus" $200-$300M given this is now largely a lumber company.
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I'm very optimistic on this sector as I've posted before and the macro forces of climate change driving higher wood use for GHG abatement, rotation out of money-burning growth stocks, unaffordable yet deliberately underbuilt housing stock in NA as a catalyst for higher building levels for longer (w/ equally large price hikes in substitute materials like steel), and the rise of CLT as a transformational change to use wood on comm/indust uses. So, that means I'm largely bullish on the winning equities in the space. I've been long on a mix of them, but the vast majority being about 1/3 each of IFP, WFG, and RFP. I closed the position and am now short (modest exposure to near term in-money puts) as I believe the tidal wave of the lumber sell off will swamp all other good news in the near term.
It is worth noting that past downfalls and subsequent recoveries are sharp and follow lumber prices tightly. I'd seen a previous comment on it being "normal" to hold though down cycles. Well, I have before, and no, I'm not doing that again. It does depend though but new positions should never be ridden into the red. In some cases, look at Canfor for instance, the farthest back Yahoo goes is 1995 and it's returned 60% since then. According by my quick math (1.60^(1/26)) that's good for an incredibly atrocious 1.8% annual return. Not keeping up with the market is one thing, but getting blown out by CPI to produce a negative real return over nearly 3 decades? Wow, that ain't normal and you have to get out of bed pretty early in the morning to deliver such an abysmal return. Side note: some names that are income heavy are low but that's intentional -- doing the above with Acadian Timber it's hardly above inflation at 4%... but they pay out 6% or so rain or shine, so that's a respectable 10% total in my books. But Canfor is a tradeable name in the shorter term horizons. That's the paradox
So, no, it's not normal to ride a stock off the edge -- that's where you get promoted to "involuntary long term investor" in many cases. It ties one's hands and the zero div norm for most (RFP, IFP) or v. modest (WFG) makes not getting paid to wait an aggrevation. The big issue is opportunity cost and what you miss while in loss-waiting-out jail.
On the flip side, the risk of bailing early at trouble is over trading, not getting back in to capture the upside, your spouse showing up with a new car bought with the cash. If I had exposure in a meaningful way to those risks, and knowing what the next few years look like in lumber, I'd just long term hold too. So, it's a neunce that few capture but is worth noting. Much like the adage about free advice, too.
I am fundamentals-dominated and don't tend to hold positions short term -- but if I buy a stock I expect it goes up. Otherwise I'd not buy it. Fundamentals! If I'm wrong? It's a humility and survivorship play to cut that short. Just a counterpoint I thought worth noting -- stock picking is a dubious move for most folks, and reflexive rigidness in the face of worsening news is a bad scene. I was worried last weekend, Monday was a wash; and I got totally out of all forestry names Tuesday AM.
Next week has ongoing downward pressure as limit down lumber moves result in pent up future declines. The full scope of the losses is not yet reflected in other words. The bid for Mar futures sits at $1118, so $25 down from close. The bids have been setting the tone all week. It's likely to persist.
Why downward pressure? Interest hikes to a degree, so somewhat like the 2018 crash. I view it as a paper tiger for the most part -- the underlying demand for housing is too great to be impeded much and the companies have de-risked their balance sheets. But this time, there more risk. It's aided by tough weather, a Newtonian (equal and opposite) reality coming from gaining an unexpected $700/mfbm or so (windfall.... my view). But the big thing putting this on ice may be the retail freeze, like the effect we saw in 2021 -- prices are at the level where the retail demand largely evaporated. That is where the legend of the $40,000 tree house was invoked. It matters: R&R, fueled by the aging out of NA housing stock, is a greater take away than building. Plus it absorbs the prime grades (solid premium over #2 construction lumber which is the futures benchmark) -- that is key for revenue.
My take, substantiated by some insights from industry types more right than wrong, is only modest changes in demand are driving spikes. This is likely to be equal and opposite. So, it may (should?) go all the way back down to $550 or so. Maybe below -- this will test the mettle of mills. Home Depot is accustomed to the BC guys running cash losses to provide their shoppers with the $2 2x4 they believe they are entitled to -- so the 2021 response (curtailments) saw the price bouce off the marginal cost of the high cost jurisdiction (BC). We may see that again. As we should. And who knows, maybe a smart procurement person decides to buy big at $800 lumber in anticipation of $1500 lumber in 2023 and that proves to be the low.
Futures should be a crowded trade too as I'm sure the mills are frantically selling forward. But, more supply than demand is not promising for prices. This industry has many sole agents acting individually right, so collectively you get a tragedy of the commons outcome like in how far and for how long they ran at cash losses trying to be last man standing. Just nuts. Back to mills and futures, they seem to be bad at this but will want to avoid being caught unhedged. I expect we invert the situation and see futures move below cash prices.
The stocks only modestly reflected the price gains, so the downside is moderated too. I can see lumber dropping by another 50% near term, but there's maybe 20% give or take downside for the better names that buy back shares (IFP and WFG). RFP is a tough call as pulp is doing well and their deleveraging impact is still being written and is a better chance to make up ground. I see them having 10% to 30% downside regardless. Then there is the Wild West. Ohhh boy. Take the cowboy run&gun CFP approach overlaid with a steadfast refusal to return capital. They will have exciting prospects of far greater downside and highly reduced upside as they won't buy back their shares on the cheap either. Canfor is likely amplified (bad on top of bad) or mitigated by the inevitable boom in M&A that will result. They will be shopping, like the others, but don't have a lot of fallback options that are constructive. Not a good poker position... negotiating with modest BATNA is for chumps. If the mom and pop mills all ask way too much and Interfor can just shrug and buy back shares then come back a year later once capitulation sets in. Canfor on the other hand is facing more pressure to act and respond to the larger and more transformational moves of IFP and WFG and with no other uses for cash they may just kick some doors in for fun (mgmt has to do something to justify big bonuses, right -- and a flurry of action shows old Jimmy we are busy). Fun and exciting times! The same way having a crazed lunatic in a casino entrusted with your retirement saving is exciting. The strong balance sheets are also helpful, but pitta da fool who goes back to net debt given most peers will stay deleveraged I think (well, and hope). Like the BMO guy said, there's a "drunken sailors" approach to spending historically so keep that at bay with this de-risked new reality. Actually, final thought, is those with good equity can acquire easily. See WFG and Norbord -- Canfor would have had to print so much of its trash equity that the Norbord guys would own the vast majority of the combined company. Thus, a Canfor has far fewer options and would have had to finance a Norbord style deal with cash (on hand plus lots of debt).
I'd hoped that the rotation play -- from growth to value -- would see the sector diverge and rise. As we know, hope is not a strategy. Wrong call! It may have come to pass if the lumber bubble lasted longer. But in a falling price enviro even if you see companies move from 6x to 8x valuations (on trend EBITDA) it's going to be based on the already modest earnings forecast today. That's less than the already tepid $550/mfbm (or thereabouts, that's what I'd roughly back into) used by the (mostly) sad cohort of reactive and usually wrong analysts (looking at you, CIBC, BMO, Scotia... and now Goldman with a brutal call on LPX). Credit to RBC and RJ for at least being able to consider realities outside of the exceptional recent past. Unfortunately I expect a sharp reduction is coming on all fronts. But for CIBC they have the ignoble outcome of being $36 targets on IFP when it was trading over $40... belatedly doing the upgrade to $46ish... which will be in force when the company is back in the $30s.... then issuing a target below the initial $36. If some poor rube followed that insane erratic ride, you'd be sidelined to mid January where you go long... then hold to the inevitable cut and sell for as much as a 50% loss on my presumptive forecast. And that's why we can't have nice things as an industry. This is almost impeccably timed as a way to destroy value.
Anyway, lumber (and by extension stocks) are likely red near term until it isn't -- suddenly the seasonal strength kicks in, repair and reno snaps back, and the storm clouds are gone as the worst is over. That's where I'm back in. Usually you know when you know. And I am no pioneer as I'm also following the interplay on commodity/equity pricing overlaid with supply/demand deltas and the interest rate story. The CAD/USD is a factor as Canada's rate hikes may move faster or slower -- all equal we like a low CAD here, so faster hikes could pour cold water on some of my recovery thesis.
Notably, my take is this coming reversal is not going to be V-shaped, but the clock is ticking and I see recovery sooner than later for the spring building season -- so maybe a fast moving L-shaped recovery. I do expect elevator down, but barring adding the expanded limits to futures, it's going to be a rough ride down. CME posts current limits -- it's $45 still. Going expanded is a function of precious volatility so isn't on the table as far as I know. If lumber free falls to $600, that's going to take st least 13 trading days. The stocks are going to be beat to heck if you run that kind of sustained blowout for pretty much 1/2 of Q1-2022. It will be in the thick of earnings reporting too, muting any good news that emerges.
Anyway, I don't do justice to the topic bashing out a phone-post with no structure, but the original take -- play defence and be agile -- is key. The "HODL" chants from the so-called Apes of the meme stocks are proudly being destroyed for the principle of Diamond Hands, but we need not play that game. I Paper Hands it all the way, and that seamless transition long to short has risks (an abrupt and unforeen turnaround) but I trade on probabilities not front black swan possibilities. Plus, I'm trading with the houses' money, so it's nothing personal -- being able to decouple the emotion is key. Be agile, be ready. If you are not, hold a fund. The Corton one is good and should catch a tailwind from the timber pricing upswing last week, but I've never looked at their strategy for draw downs like this. Ditto those ETFs, WOOD and CUT. They seem moronically constructed however, so I've always had zero use for them -- worst case there is a fraction of the upside and all the downside. At least Corton's gives you the (departed and rapidly fading) upside with downside (I.e. degree to which they move to cash) to be determined.
I should note history rhymes in cases like this I believe the relative timing and performance of stocks/lumber has similarities to past drawdowns. Most analysis, if you can call it that, I've read from the "hodl" crowd is whataboutisms (so, assorted trivia teasers and anecdoes, many of which are immaterial to earnings or literally backward looking, which are held up to be an antidote to the tidal wave that just hit) or Q1 earnings. That's baked in, man. The market can't seem to discount very far for lumber, plus it's wildly inefficient, but if you think the capacity adds and big Q1 is going to surprise the market it's a bold strategy (in the parlance of the Dodgeball meme, Cotton). There is downside risk though of M&A as I've alluded to because what if the prices are like WFGs Angelika at nearly $1000/mfbm? Greenfields are 2/3 of that... fine in the context of strategy and a bull market, but pay that price in today's falling market and watch your stock gap down 20% the next day.
So we may have the realistic possibility of one more overreaction to an overreaction, rinse and repeat. It's not the last we've seen of $1000 lumber, and I am struggling to comprehend the sheer good fortune on the chance to replay buying in heavy (well, re-buying) in both April/May 2020 and then Sept/Oct 2021 -- it may come up again so soon. I don't split out those periods but am north of 200% total return in the last 20 months because I took decent initial positions and chased them up. (I also think that averaging down is highly illadvised in this sector barring something like an Acadian Timber). This next time likely will be more muted as there should be more competitors out there (a crude amateur with no explicit edge like me should not see those types of near-term results, and nor would it be possible on a less thinly traded sector), but it's worth noting my poor timing on Sept/Oct too -- going in for Aug or Nov would have been materially higher results still. I didn't close those (at the time) red positions either since the lumber fundamentals were rising... but I would have otherwise cut the losses. Most of my averaging up was in late Dec and Jan, so some chunk got sold at a loss in my massive Tuesday sell-off.