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Bull Of The Day: Weyerhaeuser (WY)

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The stay-at-home initiative, combined with historically low-interest-rates, has caused a fierce rally in lumber. Lumber futures have surged over 155% since their lows on April 1st, and this rally still has legs with demand continuing to swell.

All this momentum is catalyzing my purchase of US lumber giant Weyerhaeuser (WY - Free Report) , as analysts rush to increase their estimates and savvy investors swarm to get in on the action. WY has been propelled into a Zacks Rank #1 (Strong Buy) as EPS estimates are driven higher on both long and short-term horizons.

Buying Into The Lumber Rush

Do-it-yourself (DIY) home projects have been the hottest hobby amid the global quarantine, with the world finally running out of excuses for why they don't have time to fix the cabinets, redo the deck, build that fence, etc. I'm sure many of you can attest to this as I can.

This DIY initiative has created an enormous amount of (albeit short-term) demand for wood, which kickstarted this lumber rally. The rally will be sustained by home builders who are rushing to get houses up and on the market as prime mortgage rates slide below 3% for the first time in history (despite a marginal bounce back from their lows). Those who've been considering purchasing a new home are now pulling the trigger as the economy begins to turn around. According to the US Census Bureau and the Department of Housing and Urban Development, new home sales in November were 841,000, a figure that continues to drive past both analysts' estimates as well as 2019 figures. In November, single-family homes were "20.8 percent (±19.5 percent) above the November 2019 estimate of 696,000."

I anticipate this uptick in new home sales to progress as the rapid economic rebound continues. With more people looking to move out of city centers and into quaint suburbs and rural areas, home builders still have a lot of work on their hands as hybrid and completely remote working models become the norm in the post-pandemic world. This means the high demand for lumber isn't going anywhere but up.

Why Weyerhaeuser (WY - Free Report) ?

Weyerhaeuser isn't exactly a sexy company and doesn't have the same level of analyst exposure as many exciting tech firms, which makes it prone to valuations that are below intrinsic value. Today WY is breaking out from its underappreciated valuation, and we are taking advantage of the continued momentum-driven opportunity.

WY underperformed its cohorts amid the COVID downturn because of its conservative dividend suspension to maintain liquidity amid the pandemic's uncertainty. This dividend has been reinstated in full force, with a robust $0.68 annual base dividend, representing an over 2% yield combined with a supplementary dividend that will be based on the company's yearly cash-flows, moving forward.

Weyerhaeuser's strategic timberland in the Pacific Northwest is driving an enormous amount of growth for the company. This region is expected to continue accelerating growth as its Canadian competitors are plagued by pine beetles, causing a supply shortfall amid this lumber demand surge.

WY’s wood products are also anticipated to be a significant profit driver moving forward. Analysts estimate residential construction activity to soar in the coming years, which will significantly benefit Weyerhaeuser's sales and profit margins.

WY has tracked lumber futures prices almost perfectly up until the COVID-crisis. This has presented us with a rare opportunity to cash in on the lumber rush after it happened.

Over the past 3 months, lumber futures have soared 155% to their highest level in history. I believe that we still have more room.

From my TradingView chart below, you can see that Lumber futures just bounced off a critical Fibonacci Retracement level around $675 and looks to be headed back towards its end of August highs. WY is poised to ride this lumber surge to the moon.

The Takeaway

WY is positioned to continue surging with lumber prices and the recovery of the economy. This is a lucrative cyclical stock that investors have begun to pivot into as they put more of their sideline cash to work and rotate profits from their COVID winners.

We are looking at a strong WY resistance at roughly $30.80, a level that I will be looking to add to my position. But you may not want to wait to take advantage of this unique COVID-driven opportunity that has wheels as a recovery stock.

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