Up and to the Right + LPX !?!?

Let’s take a look at Louisiana Pacific - LPX - $112 (all-time high $120) . This stock presents an important issue. LPX reports next week, but let’s dive in anyway.

LPX is what my friend Tim calls an “up and to the right stock”. That means a stock that is well off its low, and is actually near its all-time high, with a chart that any growth stock investor would love.

What I am about to write has never been written in any investment textbook, or any discussion a professional investor.

Buy low, sell high, is a pretty simple concept.

I prefer to start many of my new positions in stocks selling near their 52 week low, or even better near their 5-year low. In the olden days, before screening software, we had to use the new low list that was published every day in the Wall Street Journal. In a perfect world every new ideas would come from this category, but practically speaking it is just not possible.

If I cannot buy a stock near its low, I prefer to buy a stock that is 25% to 50% below its all-time high.

I prefer that these two groups are 85-95% of my new ideas.

There is another group that we at least have to think about. That is a stock well off its low and near its all-time high. LPX is in this category. That is, buy high, sell higher. In an ever rising market, like we have had since 2008, I would guess that that most professional investors buy at least 50% of their new ideas from this group.

Of course, momentum investors buy 100% of their new ideas from this category.

When is it ok to break our discipline, and buy a stock near its high?

Seldom, but not never.

LPX is restructuring story on steroids. It is at least worth thinking about buying LPX at its current stock price. I am far from saying I would do it, but I will think about it.

I wrote about this issue in a January 10, 2023 post.

CHH - $151 - has been a decent stock to own the last two years, but not a home run. The real high quality stock I missed was Williams-Sonoma - WSM - now $216, that would not “chase” as $100 in 2023.

Is LPX another WSM?

LPX has done a amazing job of restructuring. They transformed sawmills that made raw lumber into mills that made OSB (oriented strand board, from Ash forests). Now more than half of the OSB goes into higher margin repair/remodel than to homebuilders. At the the same time LPX built from scratch a Smart Siding business that makes siding from OSB. Vinyl siding is losing market share to OSB siding. LPX has gone from almost a pure commodity maker, to a company that is halfway to being Colgate (my ultimate brand name company). That might be a slight exaggeration, but it is directionally correct. LPX has an 85% market share in OSB siding. Another stock to think about is the Irish company, James Hardie - JHX - $32, that makes fiber cement siding. LPX has a great 2 hour investor day presentation on their website which I highly encourage you to watch.

There is still quite a growth runway for OSB siding. Add that to the dramatic under-building in the US housing market, and you have a very exciting growth business.

In addition into this business transformation, LPX has also bought back 50% of their shares and has very little debt. LPX made about $13/share in 2021, $12/share in 2022, expects $6/share in 2024 and 2025.

Is this a cheap stock? Maybe. I must admit I am attracted to the confusion.

I do not want to own a portfolio filled with this type of idea, but maybe a couple is ok. In the real world I will hope they disappoint Wall Street on 2/19, but if they do not it will be a very difficult decision.

Right now my “lean” is to buy the stock, even at $112. Wall Street has only 3 buys, and 7 hold/sells. The mortgage business will always keep me away from homebuilders, but maybe building products is the way to go.

If LPX made widgets, I might pass and wait for a disappointment. Because LPX makes home building products I think I can make an argument they are “misperceived”. Or maybe I am just going crazy and has inhaled to much formaldehyde (which LPX uses to make OSB).

WSM was just a lousy furniture stock, and then it doubled. Over 90% of investors would just buy LPX with very little thought if they liked the story. My discipline makes buying “up and to the right” stocks a very, very difficult decision. Buy high, sell higher is a strategy used every day, but not by me.

All this thinking makes my head hurt. I am going to go watch horses run in circles.