Bear of the Day: West Fraser Timber Co. (WFG)
West Fraser Timber WFG produces and sells lumber, panels, pulp and papers in the southern U.S. and western Canada. West Fraser Timber exports its lumber to the Far East, Asia, the Caribbean, Europe, the Middle East, and South America. Based in Vancouver, BC, WFG operates a diversified wood business including plywood, newsprint, wood chips, and other residuals.
The Zacks Rundown
WFG, a Zacks Rank #5 (Strong Sell), is a component of the Zacks Agriculture – Products industry group, which ranks in the bottom 33% out of more than 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months, just as it has to start off the New Year:
Image Source: Zacks Investment Research
Candidates in the bottom tiers of industries can often be solid potential short candidates. While individual stocks have the ability to outperform even when included in a poor-performing industry group, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.
The odds are stacked against WFG, and the stock is agreeing with this notion. WFG experienced a climax top in July of last year and has been in a price downtrend ever since. The stock has been underperforming and represents a compelling short opportunity, particularly as lumber continues its recent downward trend.
Recent Earnings Misses & Deteriorating Outlook
WFG has fallen short of estimates in two of the last four quarters. The company most recently reported a fourth-quarter loss earlier this month of -$1.13/share, missing the $1.11/share consensus EPS estimate by -201.8%. The stock has moved steadily lower since the announcement. Consistently falling short of earnings estimates is a recipe for underperformance, and WFG is no exception.
West Fraser Timber has been on the receiving end of negative earnings estimate revisions as of late. For the current year, analysts have revised their EPS estimates downward by -45.55% in just the past week. The 2023 Zacks Consensus Estimate is now $5.26/share, translating to negative growth of -74.48% versus last year. Falling earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.
Image Source: Zacks Investment Research
As illustrated below, WFG is in a sustained downtrend. Notice how the stock has plunged below both the 50-day and 200-day moving averages signaled by the blue and red lines, respectively. The stock is making a series of lower lows, with no respite from the selling in sight. Also note how the 200-day moving average has rolled over and is sloping down – another good sign for the bears.
Image Source: StockCharts
While not the most accurate indicatr, WFG has also experienced what is known as a ‘death cross’, wherein the stock’s 50-day moving average crosses below its 200-day moving average. WFG would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock. The stock has fallen more than 20% in the past year alone.
A deteriorating fundamental and technical backdrop show that this stock is not set to make new highs anytime soon. The fact that WFG is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.
Our Zacks Style Scores depict a weakening outlook for this stock, as WFG is rated a second-worst possible ‘D’ in each of our Growth and Momentum categories, indicating further downside ahead. Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of WFG shares until the situation shows major signs of improvement.
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