Penn Wealth Publishing

2022.01.16 Penn Wealth Report Vol 10 Issue 01

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10 penn wealth Report volume 10 issue 01 16 Jan 2022 Copyright 2022. All Rights Reserved. investment Intelligence As noted in a previous story within this issue, the building of a new single-family home was once an onerous, time-consuming, and backbreaking (at least for the workers) venture. When Levitt & Sons came along and standardized the process, they found it necessary to vertically integrate to better control outcomes. When lumber wasn't being delivered at the agreed upon time, the company bought up forests and sawmills. When large quantities of defec- tive nails were being received from the distributor, Levitt acquired its own nail factory to ensure qual- ity control. e company became the model for the homebuilder of the future. While modern homebuilding remains highly sys- tematized using the reverse assembly line process created by Levitt & Sons, vertical integration is too costly of a proposal for the builders. Instead, they rely on an efficient supply chain to provide the needed raw and refined materials on a just-in-time basis to keep churning out the homes. But what happens when the global supply chain suffers a massive disruption? It may seem as though few of the materials needed in the homebuilding process would be stuck on a cargo ship from China, but—sadly—that is not the case. While the US produces much of the wood used in a new home, think of the electrical system, the plumbing lines, the appliances, the fixtures, and the thousands of parts required to make every device operate. For example, right now there is even a short- age of the springs needed to operate a garage door! Slowly, the supply chain issues will abate. As they do, we see plenty of opportunities in this market. Materials—from wood to aggregates to chemicals When thinking of home construction, lumber is probably the first product which comes to mind. According to the National Association of Home Builders, it takes over 13,000 board feet of softwood lumber to build the average 2,100 square-foot house. Literally a home-grown item, the US produces some 50 billion square feet of lumber each year, with our neighbor to the north, Canada, supplying some 25% of what US builders use. Unfortunately, lumber prices have skyrocketed over the past year, going from around $400 per thousand board feet (MBF) to $1,700 per MBF last spring. Prices then dropped back to a more normal range, but have since spiked once again to $1,089 per MBF for January delivery. Adding fuel to the fire, the Biden adminis- tration just doubled the Trump administration's tariff on softwood imports, from 8.99% to 17.99%. Irrespective of the rationale, those punitive fees trickle directly down to the builder and, thus, the home buyer. No wonder housing prices have gone up nearly 20% in the past year. Needless to say, the major timber interests are flush with cash, and we believe demand will remain strong; in fact, it should only increase as prices come back down. We further believe that the Biden admin- istration will be forced to back off from its tariff stance due to inflation concerns at home. All of this bodes well for the industry leaders, many of whom are stellar mid-cap plays. Two of our favorite timber companies are Weyerhaeuser WY $40 , a $29 billion REIT which pur- chased fellow timber REIT Plum Creek five years ago, and West Fraser Timber Co, Ltd WFG.TO $115 , a $12 billion softwood lum- ber company with mills in British Columbia, Alberta, and the Southeastern US. Instead of betting on one name, how- ever, investors should consider the iShares Global Timber & Forestry ETF WOOD $90 , which contains 25 hand-selected names (WY and WFG.TO happen to be the largest holdings), as well as up to a 20% weighting in related futures, options, and swap con- tracts. We have used WOOD and its ETF competitor, the Invesco MSCI Global Timber ETF CUT $36 , as tactical plays in this When thinking of new home construction, the obvious first thought for investors is the builders; but many sectors and industries play a vital role Cargo ships awaiting offloading sit idly in port; image licensed by Penn Wealth Homes & Durables Investing in New Home Construction Goes Well Beyond the Homebuilders e contents of this report reflect the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money.

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