2 Stocks to Buy, 2 Stocks to Avoid Amid the Canadian Lumber Tariff


Canadian lumber - 2 Stocks to Buy, 2 Stocks to Avoid Amid the Canadian Lumber Tariff

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No stranger to bold words and actions, President Donald Trump announced a tariff on Canadian softwood lumber. The decision stems from an ongoing trading dispute with our normally friendly neighbor. The Trump administration accused Canada of unfairly subsidizing its lumber industry, as well as violations of NAFTA. A recent Canadian policy over the milk trade has impacted U.S. farmers, sparking the Canadian lumber tariff.

In an atypical Canadian fashion, their government responded fiercely that the justification for the tariffs are “baseless and unfounded.” Canada’s Foreign Minister Chrystia Freeland and Natural Resources Minister Jim Carr ratcheted up the pressure, claiming that they will “vigorously” defend against the Canadian lumber tariff, “including through litigation.” Amid the unusual conflict between two brother nations, the “Canadian dollar dropped to a four-month low against the U.S. dollar.”

President Trump’s economic policy has generated yet another controversy. When the former reality TV star was president-elect, he announced his intentions to withdraw from the Trans-Pacific Partnership (TPP).

That decision was more palatable to the American people because it largely impacted nations far away from us. But the Canadian lumber tariff is a different species. Despite ongoing jokes we make about them, our northern neighbor is a resolute ally.

It takes a lot to tee off Canadians. They proudly regard themselves as extra polite and patient. However, our Commander-in-Chief was decidedly up to the challenge.

Naturally, investors cranked out their “stocks to avoid” lists. The Canadian lumber tariff is a bigly affirmation of the president’s “America First” policy. Losers will inevitably emerge. However, the tax on Canadian lumber will also boost some companies into stocks to buy. Nothing in the markets occurs in a vacuum, especially when Trump is involved.

This should be a time to stay calm and reassess the situation, eh? Here are two stocks to buy and two stocks to avoid from the Canadian lumber tariff drama.

Stocks to Buy After the Canadian Lumber Tariff: NCI Building Systems (NCS)

Stocks to Buy After the Canadian Lumber Tariff: NCI Building Systems (NCS)
Source: Source: JYE Financial, unless otherwise indicated

You would think that a Canadian lumber tariff is a “big league” minus for building companies. But NCI Building Systems Inc (NYSE:NCS) bucks that assumption completely. On Tuesday, following President Trump’s tariff announcement, NCS closed up 5.4% against the prior session. This action brought the year-to-date haul of NCS stock past 13%.

Although the optimism sounds contradictory, it’s actually not. NCS is entirely levered to commercial real estate. The Canadian lumber tariff specifically addresses softwood lumber, which is mostly used in residential construction. Commercial buildings, in contrast, are metallic albatrosses because they have to be. Although softwood lumber is used, the price increase is certainly not going to cut deep into NCS.

What will impact NCI Building Systems is the business environment — and business is good! Consumer sentiment is up. Unemployment is down. Job vacancies are on the rise, implying that workers are seeking better opportunities. Also, new opportunities are opening up to previously discouraged job hunters. Logically, demand will ramp up for commercial real estate projects, which in turn is bullish for NCS stock.

With so many tailwinds, the Canadian lumber tariff is just a minor blip for commercial builders. Therefore, you need to put NCS on your stocks to buy list.

Stocks to Buy After the Canadian Lumber Tariff: Masco (MAS)

Stocks to Buy After the Canadian Lumber Tariff: Masco (MAS)
Source: Source: JYE Financial, unless otherwise indicated

As an extremely influential brand in home improvement, Masco Corp (NYSE:MAS) is surely on the stocks to avoid list. After all, the Canadian lumber tariff is a direct attack on American residential projects. But theory and actuality don’t always mix. MAS stock jumped over 5.3% on Tuesday, almost exactly replicating the performance of NCI Building Systems.

What gives? MAS is up to an over 18% lead in the markets, rebutting the Canadian lumber doomsday argument.

Upon closer inspection, though, the Masco bullishness makes plenty of sense. First, they are a global brand. International sales channels can help make up losses resulting from the Canadian lumber tariff. In fact, prior tariffs of Canadian lumber resulted in cheaper exports to other countries. It doesn’t matter where MAS gets its sales from — money is money.

The other factor is business diversification. The tariff will surely pressure domestic new home sales, which will slightly hurt MAS. But as previously mentioned, broad economic sentiment is on the upswing. Logically, renovation projects will rise in demand — this is where Masco will more than make up for any deterioration in new home projects.

Despite the noise from the Canadian lumber tariff, don’t be afraid to put MAS stock in your stocks to buy list.

Stocks to Avoid After the Canadian Lumber Tariff: D.R. Horton (DHI)

Stocks to Avoid After the Canadian Lumber Tariff: D.R. Horton (DHI)
Source: Source: JYE Financial, unless otherwise indicated

The markets are purely binary — for every winner, there is a loser. In this particular cycle, that loser is new home builder D.R. Horton, Inc. (NYSE:DHI). For the day, DHI stock lost a little more than 1%, but further pain is likely. Over the last five days, D. R. Horton has lost 2%.

No one finds these results surprising. Softwood lumber is the main ingredient in modern residential housing construction. “Residential products,” such as box spring mattresses, also utilize Canadian lumber. Obviously, the main challenge for DHI is the profitability margins. The tariff, which ranges from a 3% to 24.1% penalty according to a Bloomberg report, is an unnecessary burden.

I’m particularly confused by contrarian arguments proposed through CNBC that the tariff is largely a non-issue. On average, homebuilders like DHI may see a commodity cost penalty of around 10%. However, that is a 10% cost that they never had before. The fact that the Canadian lumber tariff was expected by industry experts doesn’t mitigate the challenge.

If the tariff was a short, one-off event, I wouldn’t place DHI on the stocks to avoid list. But with President Trump’s hard-nosed personality, the signs are not at all favorable.

Stocks to Avoid After the Canadian Lumber Tariff: PulteGroup (PHM)

Stocks to Avoid After the Canadian Lumber Tariff: PulteGroup (PHM)
Source: Source: JYE Financial, unless otherwise indicated

The tariff announcement hit PulteGroup, Inc. (NYSE:PHM) particularly hard, causing it to lose nearly 4% in the markets. Leveraged towards the new homebuilding business, the ugly sentiment towards PHM was not shocking. PuelteGroup was, however, bloodied considerably more than D.R. Horton and other competitors. PulteGroup’s dual exposure to homebuilding and financial services is a trouble spot amid the Canadian lumber tariff.

The upside challenge for PHM is twofold. First, the tariff itself is obviously a direct impediment to their financials. This results in higher pricing for new homes at a time when this sector is doing well, but not great. Although new home sales have improved recently, they underperform historical averages. The higher pricing will shift some demand to second-hand real estate, and thus deny PHM up-sale opportunities.

Am I reading too much into the Canadian lumber tariff? It’s possible, but the most important entity agrees with me — the markets. PHM gapped down sharply on the tariff announcement. It’s currently trading roughly between its 50- and 200-day moving averages. The selloff also occurred on the heaviest volume of the year.

We can’t all be crazy. That’s why I’m placing PHM on the stocks to avoid list.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/04/stocks-to-buy-stocks-to-avoid-amid-canadian-lumber-tariff/.

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