By Daniela Pylypczak
The past week has seen a number of factors combine to push timber prices and forestry stocks higher, with the most notable force coming from Hurricane Sandy. The superstorm wreaked havoc on the East Coast, as its destructive path reached 1,000 miles across, leaving millions of homes and businesses damaged and powerless. Estimates of the damage have come in at a staggering $50 billion, making Sandy the second-most expensive storm in U.S. history, behind Hurricane Katrina.
While Sandy’s victims start the painstaking and enormous task of rebuilding and restoring the east coast, demand for commodities – particularly timber – has soared since the hurricane’s wake. The day after Sandy struck, markets had immediately taken their cue, sending lumber futures to 19-month highs. Currently lumber futures are contangoed until May of 2013, reflecting investors’ expectations of increased demand over the next few months.
Low Supplies, Increasing Demand, Big Opportunities
Typically, demand for lumber in the winter months is seasonably lower, but “A shock like this could keep prices higher and for longer in a season when it is typically weak,” says Daryl Swetlishoff, a forest products analyst at Raymond James Ltd. The combination of the sudden need for building materials with low inventories certainly presents a unique opportunity for those looking to get in on the timber rally.
Even before the storm, however, several analysts had already foretasted timber to be one of the best performers over the next couple of years. In September, government data showed an upward trend for housing with single-family home starts rising 43% in September compared to a year earlier. Meanwhile, residential construction is now running at its highest level in four years, up 15% in September from the previous month. With the U.S. housing market showing signs of strength and continued recovery, investors had already begun piling into lumber futures and timber stocks.
And now that Sandy has put yet another strain on the industry’s low inventories level, prices and profits are sure to be on the rise. While the full impact of the superstorm may take several months to be felt, investors may want to start establishing tactical tilts toward this sector. For those looking to use the ETF wrapper, we outline two options:
- S&P Global Timber & Forestry Index Fund (WOOD): This ETF measures the performance of firms all over the world that have their hands in the forestry and timber business. In the trailing one-week period, WOOD has popped 2.72% higher, while year-to-date, the fund has gained over 13.4%.
- Timber ETF (CUT): Offering similar exposure, CUT is yet another ETF option, though it charges 17 basis points higher than its competitor. Year-to-date, the fund has gained 14.75% and currently boasts an annual dividend yield of 2.04%.
Disclosure: No positions at time of writing.
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