We recently published a list of The 15 best lumber stocks to buy now. In this article, we take a look at where International Paper Company (NYSE:IP) is performing compared to other lumber stocks.

The lumber market has experienced significant volatility over the past few years due to a confluence of dynamic and interrelated factors. In 2021, lumber prices rose to unprecedented levels as the COVID-19 pandemic disrupted supply chains, a surge in home construction increased demand, and logistical challenges added stress to the market. However, that peak was followed by a dramatic price correction as these extraordinary conditions began to stabilize. Currently, lumber prices have fallen 75% from their May 2021 record high of $1,514 per thousand board feet to just $366, almost at pre-pandemic levels. The futures market reflects this decline, with July contract prices falling 28% to $466. The chart below from the U.S. Bureau of Labor Statistics clearly shows the change in lumber prices over a five-year period.

The sharp decline in lumber prices reflects a slowdown in both new construction and renovations, largely due to high home prices and increased mortgage rates that have reduced housing affordability. This has led to lower demand for lumber, with a notable 52% year-over-year decline in multifamily housing starts and a 2% decline in single-family housing starts through May, Fortune reports. In addition, the home renovation market, which had previously supported high lumber prices, is now also weakening. Retailers like Home Depot are seeing sales declines, especially on larger projects.

On the supply side, the lumber industry expanded its production capacity during the boom years, anticipating continued high demand. However, this new supply is now coming to market at a time when demand is low, exacerbating the oversupply situation. Experts believe lumber prices could stagnate near current levels through the end of 2024, with a small increase possible. Looking ahead to 2025, some sawmills may cut production, and interest rate cuts could spark a modest recovery that would potentially push prices to $500 to $600 per thousand board feet. Investors should be aware of ongoing volatility and regional price fluctuations when considering opportunities in the lumber market. For those looking to find the best lumber stocks to buy, the S&P Global Timber & Forestry (GTF) Index offers a valuable benchmark. The index is designed to measure the performance of companies that own, manage, or are involved in the upstream supply chain of forests and timberland. It targets a sample of 100 companies. This includes forest products companies, timber REITs, paper products companies, paper packaging companies, and agricultural companies operating in these sectors. As of August 1, 2024, the index has demonstrated a robust 10-year return of 4.24% annualized and currently stands at 2,012.10. This performance underscores the stability and growth potential of the index, making it an important consideration for investors in the timber and forestry sector.

The story continues

According to the report by Timberland Investment Resources, investing in timberland offers several notable benefits and considerations. Timberland is a tangible asset that acts as a natural hedge against inflation. When inflation rises, timberland often increases in value, helping to preserve purchasing power. This characteristic makes timberland an attractive option for investors seeking protection from inflationary pressures. Additionally, timberland offers significant portfolio diversification due to its typically lower volatility compared to traditional equities. This lower volatility can contribute to more stable long-term returns, making timberland an attractive choice for investors seeking a balance between risk and reward. In addition to capital appreciation, investments in timberland can also generate a steady stream of income through timber harvesting. This dual benefit of income and appreciation makes timberland a valuable asset class for long-term investors.

The report also highlights the importance of sustainable management practices when investing in forest land. Effective management is critical to maintaining the health and productivity of forest land while complying with environmental standards and promoting ecological balance. Sustainable forestry practices such as selective logging and reforestation ensure that forest land remains productive and environmentally sound in the long term. By implementing these practices, investors can mitigate negative environmental impacts and support the economic viability of their forest land. Sustainable management not only helps to maintain the value of the investment but also meets growing environmental and regulatory expectations.

However, the report also identifies several risks associated with investing in forestlands. Timber prices can be highly variable and influenced by fluctuations in supply and demand, which can impact profitability. In addition, forestlands are vulnerable to natural disasters such as wildfires, storms and pest infestations, which can cause significant damage and affect yields. Regulatory changes and evolving environmental policies also pose risks that potentially impact the operational aspects of forest management. To effectively manage these risks, the report stresses the importance of selecting well-managed forestlands and working with experienced forestry professionals. Proper due diligence and active management are essential to mitigate these risks and maximize the potential of forestland investments. Overall, while forestlands offer stable growth and diversification benefits, they require careful management and a long-term perspective to fully realize their potential.

The Food and Agriculture Organization (FAO) forecasts a 37% increase in consumption of primary processed wood products by 2050, according to its latest report. This increase includes materials such as sawn timber, plywood and pulp, which are expected to reach 3.1 billion cubic metres. The increase is expected to be even higher, up to 23%, as modern wood products such as solid wood and man-made cellulose fibres become more prominent as replacements for non-renewable materials. Due to its renewable and versatile nature, wood is a key player in efforts to replace non-renewable resources and address climate change. FAO stresses the need for sustainable forest management and increased production from both naturally regenerated and planted forests to meet future demand. Expanding production will require total investments of around US$40 billion per year, and an additional US$25 billion is needed for modernisation. The sector may face challenges in maintaining employment levels and ensuring adequate training for a more demanding workforce. As demand for wood energy grows, particularly in developing regions, it will be crucial to balance traditional use of fuelwood with modern biomass energy.

According to the National Association of Home Builders (NAHB), single-family home construction is expected to increase in 2024 despite ongoing supply-side challenges. Higher interest rates have impacted the housing market over the past two years, but with the Federal Reserve expected to cut interest rates in the second half of 2024, mortgage rates are expected to decline. This should boost home construction, although supply-side issues such as rising prices and material and labor shortages will remain. The NAHB forecasts single-family home starts to increase 4.7% in 2024 and 4.2% in 2025, but notes that this growth will not fully address the nation’s housing deficit of about 1.5 million units. Despite the projected increase in construction activity, the multifamily housing market faces challenges. Multifamily housing starts are expected to decline 19.7% in 2024 due to tight credit conditions. However, with a high volume of housing currently under construction, rental growth is expected to slow, potentially dampening inflation. Developers remain optimistic and the majority plan to expand their activities, even as they face hurdles such as high regulatory costs and fluctuating land prices. Housing demand continues to shift as different generational preferences influence market dynamics. To overcome these challenges, new construction must be balanced with sustainable practices and increased housing supply.

Our methodology

We’ve shortlisted the holdings of the iShares Global Timber & Forestry ETF, ranked them by the number of hedge funds in each stock, and listed the 15 most popular timber and forestry stocks below. Essentially, our article highlights the best timber and forestry stocks to buy, according to hedge funds.

A close-up of a hand assembling boxes of industrial packaging on an assembly line.

International Paper Company (NYSE:IP)

Number of hedge fund owners: 37

International Paper Company (NYSE:IP) manufactures and sells packaging and pulp products based on renewable fibers in North America, Latin America, Europe, and North Africa. The company operates in two segments: Industrial Packaging and Global Cellulosic Fibers. In the most recent earnings report on July 24, International Paper Company (NYSE:IP) reported normalized earnings per share of $0.55, beating expectations by $0.13, while GAAP earnings per share were $1.41, beating forecasts by $1.00. Revenue reached $4.73 billion, but missed forecasts by $31.67 million. The company’s dividend yield is 3.94%, and its annual payout is $1.85. The last announced dividend is $0.46, with an ex-dividend date of August 15, 2024 and a payout date of September 16, 2024. The forward P/E ratio is 29.18, suggesting a higher valuation relative to earnings.

In the first quarter of 2024, the number of hedge funds with positions in International Paper Company (NYSE:IP) increased from 31 to 37, according to Insider Monkey’s database, which tracks 920 hedge funds. The total value of these holdings is approximately $756.33 million. During this period, Edgar Wachenheim’s Greenhaven Associates became the largest shareholder of these hedge funds.

Total IP 2nd place on our list of the best lumber stocks to buy. While we recognize the potential of IP as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you are looking for an AI stock that is more promising than IP but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

READ MORE: Analyst sees a new $25 billion ‘opportunity’ for NVIDIA and Jim Cramer recommends these 10 stocks in June.

Disclosure: None. This article was originally published on Insider Monkey.