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 talking 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 little signs of improvement. Housing and most related construction service industries are just trying to survive. They have all cut back production.
There is little 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 have 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 buy 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 large 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 is not 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 bought 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 best bet, if you are interested, is to buy a few shares now and a few shares later and ease into this boring company. If you do, you will be in good company. The shares closed 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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Reader Comments (Page 1 of 1)
4-10-2008 @ 4:14PM
Michael Schneider said...
Some time ago when Jim Rogers was a panelist on Cavuto on Business another panelist recommended USG. Jim Rogers almost always trashed the picks of the others and he was usually right (not on Coca-Cola though) but on the USG pick he was very interested and said he would have to keep a watch on it. Someone mentioned a bad economy but that didn't worry him too much on USG because the stock was (and is) so out of favor. i don't think he ever bought the stock or we might have heard about it. It's still sitting on my watch list also. The difference now is everyone sees a slowdown and USG has more company as an out of favor stock. I think you are spot on in saying it could be early to jump in with both feet but at some point this could turn out to be a great opportunity.
4-10-2008 @ 4:42PM
Gabe said...
Sheldon, come on man. Where the heck did you read that Bruce B has the second largest position? Simple/stupid mistakes like this are aggravating. GEBR. KNAUF VERWALTUNGSGESELLSCHAFT has the second largest position at 14%. How can you miss that?? Also, you spelled real estate wrong on your home page, please update.
4-10-2008 @ 5:43PM
Sheldon L said...
Gabe,
The data on Fairholme comes from AOL M&F:
http://finance.aol.com/company/usg-corporation/usg/nys/institutional-ownership.
4-10-2008 @ 5:49PM
Sheldon L said...
For anyone that cares, USG = United States Gypsum