Some value investors are finding investment ideas in Canada's beaten-up lumber sector, reports Derek DeCloet in his Globe and Mail column:
Jimmy Pattison is running though his itinerary. It is a late Friday afternoon on the West Coast, close to quitting time for most people, day six of the usual seven-day workweek for the man who is among Canada's wealthiest people, not to mention one of its most frequent fliers.
A bit later:
But it's what he is doing close to home that has people on Bay Street and Howe Street talking — and wondering. This spring, Mr. Pattison, already a major shareholder in Vancouver's Canfor Corp., began buying more of the province's largest lumber producer — and buying, and buying. In a four-month period between May and September, he laid out more than $85-million on Canfor stock, bringing his stake in the company up to 25 per cent. And he did it at a time when things have rarely looked bleaker for the industry. The U.S. Commerce Department said this week that new home construction plunged 15 per cent in October, and Canfor's profits have begun collapsing along with it.
Some of the best value investors on the continent are thinking the same thing. Several have placed large bets that the red ink in the woods is bound to stop flowing, eventually, and that by investing now, they will reap huge gains in the recovery. Their theory, contrarian as it may seem, is that the industry's economics have been so bad for so long that it has no choice but to undergo massive change. Weak players will go bankrupt, scores of mills will close forever, and a wave of takeovers will knock out the smallest players.
Then DeCloet mentions several investors familiar to Controlled Greed.com readers:
Third Avenue Management, a Wall Street investment shop run by Marty Whitman, an expert in distressed companies, now owns a 38-per-cent stake in Catalyst, and has made other large investments elsewhere in the sector, including Abitibi Consolidated Inc., the worst-performing company in the TSX composite index over the past 20 years.
Brandes Investment Partners, the San Diego, Calif., firm headed by Charles Brandes, acquired stakes in several beaten-up Canadian forest stocks, including Catalyst, Domtar Inc., West Fraser and Tembec Inc. As of July, the firm's Canadian Equity Fund has more money in forestry than in any other sector.
An investment group whose chief investment officer is Peter Cundill — a man once dubbed “the best mutual fund manager of all time” — now owns about 20 per cent of SFK Pulp Fund. Fellow value investor Prem Watsa at Fairfax Financial Holdings Ltd. this week disclosed he had increased his SFK stake to 19 per cent.
I don't own anything in this sector. But it's definitely an area worth keeping an eye on. If I end up buying, you'll read about it here.