Lumber prices have recently been soaring.  In the past year, lumber prices have risen 122% and are currently trading at all-time highs.

Lumber’s fortunes are closely tied to the housing market. Housing has been a beneficiary of the coronavirus pandemic, as many people have chosen to move out of cities and into suburban and rural areas. Even before this spike in demand, the underlying fundamentals of the housing market were solid.

Demographics are extremely favorable as the Millennial generation is entering the age bracket at which homeownership rates increase. Additionally, household formation rates for this group have been depressed, which implies even more potential demand if those rates revert to historical norms. Affordability is high due to rock-bottom mortgage rates, and household balance sheets are in good shape due to many using stimulus payments to pay off debt.

While these factors indicate strong demand, supply dynamics are also favorable. Housing inventories are at low levels. Since the Great Recession, new home construction has lagged population growth. This has resulted in an inventory crisis of sorts.

(source: Altos Research)

Currently, there are only three months of available inventory on the market. This is already sparking an increase in new home construction as new home permits are at a multi-year high. It also indicates that the bull market in housing is going to last for many years.

This development is obviously bullish for lumber prices as well. Investors can take advantage of this trend by buying lumber stocks such as Lumber Liquidators (LL), Weyerhaeuser (WY), and United Forest Products International (UFPI).

Lumber Liquidators (LL)

LL operates as a multichannel retailer of hardwood flooring. It should benefit from the increase in new home construction especially as newer homes tend to be built with hardwood floors. Additionally, rising home prices tend to lead to increased home renovations and upgrades.

Despite this favorable backdrop, LL’s shares remain quite attractive as it has a forward price-to-earnings ratio (P/E) of 22 which is significantly below the market average. Further, the company increased sales by 12% and same-store sales by 10.9% over the past year, while most companies experienced a decline in revenue.

As the pandemic recedes, LL should be a big beneficiary as traffic to stores will increase, and people may feel comfortable enough to start home improvement projects. LL has topped earnings estimates for the last four quarters while increasing gross margins. This means that shares are attractive from a growth, value, and operational perspective.

LL is rated an A in our POWR Ratings system, which equates to a Strong Buy. The POWR Ratings are calculated by weighing 118 different factors. Over the last 20 years, A-rated stocks have outperformed the major averages significantly.

The POWR Ratings evaluate stocks based on 8 different factors. In terms of Value, LL has an A grade. This is consistent with its PE ratio of 17.6 which is significantly below the S&P 500’s PE of 28. Despite this attractive valuation, the company grew sales at a 12% rate in the last quarter.

LL also has an A for Industry Grade. The Home Improvement & Goods category is one of the top-ranked groups due to the strong prospects for the housing market. Within this sector, LL is ranked #1 out of 64 stocks.

Click Here to learn about how the POWR Ratings evaluates LL for these components: Quality, Stability, Sentiment, Momentum, and Growth.

Weyerhaeuser (WY)

WY owns or controls approximately eleven million acres of timberlands in the US and manages additional properties under long-term lease licenses in Canada. The stock is a major beneficiary of current economic conditions.

For one, the strength in lumber prices means that the value of its holdings is increasing in value. Additionally, it had revenue growth of 26% and earnings growth of 185%, compared to the same quarter last year. WY also pays a 2% dividend which is higher than the S&P 500’s yield and the 10-year Treasury yield.

Another reason to be bullish on WY is that inflation expectations are rising due to low-interest rates and the trillions of deficit spending expected over the next couple of years. Historically, timberlands have been one of the best assets to protect wealth against inflation.

The POWR Rating for WY is a B, which equates to a Buy.  WY also receives a B for Stability. This is consistent with its steady dividend and position as one of the world’s largest lumber suppliers amid an environment of rising lumber prices. It also scores a B for Growth, as analysts are forecasting 10% earnings growth in 2021.

To see WY’s component ratings for Value, Momentum, Quality, Industry, and Sentiment, click here.

United Forest Products International (UFPI)

UFPI is also thriving due to record-high lumber prices and is consistently posting new highs in terms of sales, earnings, and EPS.

Its stock price is also nearing a breakout, following a couple of months of consolidation. Although the stock traded sideways during this period, its underlying fundamentals continued to improve in terms of lumber prices and earnings growth.

Over the past 12 months, UFPI has grown earnings by 28% and sales by 17%. So far, the gains in the stock price have largely tracked its earnings, but multiples could likely expand given that the stock is trading at a valuation significantly cheaper than the market average.

UFPI is rated a B by the POWR Ratings, which equates to a Buy. It is in the Industrial - Wood category which has an Industry grade of B. This is consistent with recent strength in lumber prices as well as the bullish outlook for the housing industry. UFPI also has a B for Value, which isn’t surprising as it has a PE of 17 which is well below the market average of 40.