Is Lumber the New Gold?

As both a contrarian move and a pure commodity play, I like lumber as an investment right now. Prices have fallen sharply from their peak in 2004, and the commodity is very undervalued. I also like it because the market does not have a big speculative following on lumber the way it does for some of the other commodity markets, such as gold and oil. Lumber futures are pointing to an uptrend in prices through 2007, and there is a seasonal bias to support this. In short, if you are a contrarian and want to be bullish on a commodity, here is a market with many of the elements a contrarian would love.

So, how do you "play" lumber? You can buy lumber futures that are traded on the Chicago Mercantile Exchange, or you can use an equity proxy. If you prefer to go the latter route, you have several stocks to choose from: International Paper (NYSE: IP), Weyerhauser (NYSE: WY), Louisiana-Pacific (NYSE: LPX), Universal Forest Products (Nasdaq: UFPI), and Potlatch (NYSE: PCH). All of these companies are in the forest-products, wood-production, and lumber business. Before I discuss them further, let me address a few more of the fundamental factors influencing the lumber market.