Now that investors have gone all-in on a bet that the U.S. housing market is recovering, it only makes sense that industries associated with home building are also showing big improvement.
My colleague Brent Jang reported on the weekend that lumber prices are on the mend, which is having a big impact on British Columbia's softwood lumber industry. One index of lumber prices reflects a 27 per cent improvement from the start of the year through September.
"The outlook for the softwood sector in general is quite positive over the next few years as we go through a growth cycle," he quoted David Elstone, a senior analyst with ERA Forest Products Research.
His comments might sound a little out of sync with some of the disappointing economic news flowing out of the United States these days, some of which suggest that another recession is a possibility. However, it's hard not to feel upbeat about the housing market, an economic drag for several years but now showing improvements in the number of existing home sales, housing starts and even home prices.
These improvements, though still tentative, have driven home-building stocks up dramatically, making the S&P 500 homebuilding index the top-performing industry group within the benchmark index this year. PulteGroup Inc. has risen 356 per cent over the past 12 months.
But home builders aren't the only ones benefiting from this optimistic shift in thinking – and lumber producers are among the housing-tied industries that have been catching a bullish breeze. Admittedly, there are few publicly traded companies that are pure lumber producers. However, Plum Creek Timber Co. Inc. is close, and the shares have risen 32 per cent over the past 12 months.
The turnaround certainly helps bolster the view that pension funds can be very prescient in their investment decisions. British Columbia Investment Management Corp. and Public Sector Pension Investment Board took out TimberWest Forest Corp. in 2011, for $6.48 a unit. While that price represented a 25 per cent premium to the price at the time, you would have to think that the units would be worth considerably more today if the Canadian timber producer had stayed publicly traded.
Is there a spinout in the works? Perhaps, but there could be more value for the pension funds to keep TimberWest in their fold. Global asset manager GMO LLC believes that timber is the best asset class, in terms of expected after-inflation returns over the next seven years. According to their estimates, timber should return about 6.5 per cent annually, beating expected returns on U.S. stocks, international stocks, bonds and emerging market stocks.