Chasing Value: I was early to USG, will you be too late?
Posted by: in Products and ServicesFiled under: Other issues, Products and services, Berkshire Hathaway (BRK.A), Bargain stocks, Chasing Value, USG Corp (USG), Stocks to Purchase, Housing
Last year I wrote a very positive Chasing Value article suggesting that USG Corp (NYSE: USG) looked like a value proposition when it was trading around $52 a share. We bought it and to say we were way too early would be very very kind because it dropped with the market in the summer and has only recovered slightly.
Even worse, Alan Greenspan and Ben Bernanke are finally speaking about a recession and USG is still laying off more workers, attempting to balance labor and product demand in a weak housing market and soft economy.
Berkshire Hathaway (NYSE: BRK.A) is still the largest shareholder, owning over 17% of the outstanding shares. Most of what I liked last year holds true but the depth of the economic downturn shows tiny signs of improvement. Housing and most related construction service industries are just trying to survive. They’ve all cut back production.
There is tiny consensus when the economy might start to show significant signs of improvement, but there are few people who think it will be soon, and I’ve spoken with many in the business community who think it will be 18 months at least. However, timing the market is always difficult so I believe that the best you can do is try and purchase solid companies on the cheap. The difficulties that USG is weathering now will turn into strengths in the future as it streamlines the enterprise, reduces debt, and plans for the future.
The discussion of USG in terms of value should not be hard to understand. Besides Warren Buffett’s huge stake in the company, it should also be noted that value investor Fairholme Capital Management, L.L.C, lead by Bruce Berkowitz the long time managing member and portfolio manager, is the second largest shareholder with almost a 7% stake in the company.
The stock isn’t among the common types of companies I would include among my recommended watch list. Although it has a low P/S of 0.66 (under one is favorable) and a low P/B of 1.61, it is losing money and currently has very low profit margins. It also pays no dividend, so this one is not for everybody.
You can see from the chart that USG is trading around the same price it was three years ago before the housing market went nuts. When I purchased it around $50 there seemed to be some pricing stability but that was just the calm before the storm. I do not know when the housing market will recover but I think it will not get much worse. We will continue to see defaults and meager construction starts but not further collapse.
When the turnaround comes, the stock market does not usually send out formal notices, nor do I recommend tea leaves, fortune cookies or palm readers, so your ideal bet, if you are interested, is to purchase a few shares now and a few shares later and ease into this boring company. If you do, you’ll be in good company. The shares shut up yesterday at $37.67 and is up further in trading today.
For those who do not have the resources to dollar cost average into this stock and do not have any interest in riding a stock with zero yield, patience is the order of the day. Perhaps it will test its lows again and an even better opportnity will arrise. There are no must own stocks.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of BRK.B and USG.
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