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Report Updates

We have an updated report on Xebec Adsorption Corp (XBC). The company reported disappointing quarterly results related to revenue recognition in the most recent quarter. While this presents a potential risk in the future, it remains to be seen whether this is a one-time occurrence or the beginning of a pattern. That said, the company continues to be very well positioned in a fast-growing space with plenty of growth potential ahead. We discuss more of our thoughts on the stock going forward in the report. 

Read the latest updates by logging in here!


Market Update

What is Going on with Lumber?
 
About four months into the year, if we were forced to pronounce an investment ‘theme’ for 2021, it would probably be that of ‘micro-bubbles’. In various different areas in the markets we have been seeing soaring asset prices relegated, generally, to niche asset classes or industries. Most are likely aware of the laundry list and acronyms here: SPACs, crypto, EV, Green, meme stocks, and so on. The list is not reserved to more ‘interesting’ spaces though, it has now seemingly expanded into what most would consider more boring areas of the market, specifically, lumber!
 

 
This chart does not include a typo or a data error. Lumber futures have indeed taken off over the last year, going from levels that trade in a range of $200 to $400 up to over $1,200. Anyone that has tried to build a deck recently has likely become aware of these rising prices.
 
So, what exactly is happening here?
 
Much of the surge comes from supply/demand imbalances. The supply of lumber tends to be constrained due to requirements to preserve/maintain forests that are harvested. Meanwhile, demand for wood products is on the rise as consumer budgets are higher for housing and renovations and general economic activity is expected to see an increase. In turn (and certainly oversimplifying), with demand increasing and supply less able to adjust, prices naturally go higher.  

Is this sustainable?
 
As the saying goes, ‘nothing cures high prices like high prices.’ It is unlikely that the rise in lumber will be sustained over the long-term but the key is that things can certainly still get crazier from here. Or, more benignly, prices might just settle in at this higher level over a short to medium time period. As always, no one knows where future prices go, but the higher commodities go, the higher the likelihood we would expect them to weaken going forward. With a lot of dollars in the economy looking for a home, we would be reluctant on expecting this trend to subside any time soon.
 
What does this mean for an investor?
 
Most investors probably cannot and do not want to learn about futures markets but higher lumber prices also mean that companies that sell lumber/wood products should stand to benefit from higher prices. The below chart outlines how lumber has performed compared to the iShares ETF WOOD.
 

Over the last three years, while WOOD has been no slouch in terms of performance, it certainly has been left behind in terms of returns in the last year. Digging into some of the underlying companies with exposure to lumber prices, we see the following:
 


Over the last year, we can see a handful of Canadian lumber stocks have indeed kept pace with lumber prices. There are some names that have lagged though, in the form of Acadian Timber (ADN), Stella Jones (SJ), and Western Forest (WEF). Just because these companies have lagged other forestry peers does not mean they will by default ‘catch-up’. These names might be a place to start though, for investors looking for exposure to this trend while attempting to mitigate the risk of getting in at the ‘top’ of this market. While higher lumber prices should help with quarterly results at most of these companies, it is important to keep in mind that they remain reliant on the prevailing prices of lumber. So, while they will benefit from higher prices, they will also feel the pain if/when prices decline and commodities can see shifts quickly.
 
When we see big moves in a market such as this, we always find it worth further investigation. Caution is warranted with such a large move over the last year, and end markets will have their limits somewhere in terms of what they can pay for input costs like this. However, the potential for higher prices to be sustained due to the supply side of the equation, in our view, makes it a worthwhile area for an investor to look further into.



Model Portfolio Changes
Changes as of market close on April 29, 2021.

Balanced Equity Model Portfolio 

Add 1% to Topicus (TOI) position
Trade Rationale - We think TOI is deserving of a higher weighting in the portfolio after shares were spun off from the position in Constellation Software (CSU). We continue to see TOI as a  name that can see more upside and is getting recognition as a 'mini CSU'. Using a similar acquisition playbook as CSU, the company is well-positioned to benefit from strong software growth in Europe. 


Best wishes for your investing!

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