An Early Black Friday Sale: USG @ $36.00
November 16th, 2007 by 
James Cullen
I’ve alluded to this earlier, but I think the time is right to come public and make this clear: USG anywhere near $36 is the best bargain - especially in terms of risk/reward - in the market right now.
What is the risk in this stock? Let’s consider risk in terms of loss of capital.
USG made an intra-day low at the $36 even mark before creeping back up to close a few cents higher. The significance of this is that there is a proven buyer of USG at $36/share - Knauf, a European building materials distributor - as demonstrated by the chart below. The black arrows represent days when Knauf bought shares of USG.
[You may need to scroll down to see the chart]
So now if you look at the price and volume action today, you see the shares bottoming out at $36.00 (black arrows indicate that price).
[Again, you may need to scroll down]
Now, if my thesis that Knauf will buy essentially every share of USG they can find at $36 holds, we would expect to see some sort of volume pickup at those prices. Such a set-up question…
A 15-minute moving average of volume in USG from 2:00 pm forward shows that about 5,000 shares per minute were trading hands. The exception? Those two times when the stock price hits $36.00, when we see 42,700 and 32,700 shares traded in those two occurrences. Coincidence? Look for Knauf to make another SEC filing saying they bought additional shares in the next week.
The end result of Knauf’s involvement is that I see very little chance that shares fall below $36 for an extended period of time. With a closing price of $36.3x today, risk therefore seems to be about as small as it can be with common stocks.
Of course, Knauf isn’t the only buyer of this stock. Recent 13-F filings from Fairholme’s Bruce Berkowitz and Third Avenue’s Marty Whitman show both superinvestors have been increasing their stakes in the company. Berkowitz increased his stake by 51%, and Whitman increased his stake by 40%. These two fund managers are known for their excellent track record stemming from a strict value approach. Consider yourself in good company, even ignoring the nearly 20% stake of Warren Buffett’s Berkshire Hathaway.
And since it isn’t fair to only give credit to the value guys, my favorite quant fund - Renaissance Technologies - reported opening a 200,000 share stake in USG in their most recent 13-F filing.
So where does the reward part of the equation come into play? If you take long-run demand for housing into account and compare that number relative to USG’s profitability at similar times, I come up with normalized EPS around $3.50/share, which is a number that I feel may even be on the conservative side - I’ve seen normalized EPS estimates for USG above $4.00, and they seem reasonable. Either way, it works out to USG trading at 9-10x earnings right now; with a 15x multiple on my estimate, USG would be valued at $52.50, or about 45% above the most recent close. I’m not sure how many opportunities one gets with effectively zero downside and 45% upside, and while drywall manufacturing might not be the sexiest of industries (up until last week, people gravitated away from me at parties to the kid buying Research in Motion - RIMM - calls), I do believe USG is one of safest and best investment opportunities on the planet. I think numerous individuals over a time period of many years have proven this kind of investing approach is what makes money, and I think you’ll do a favor buying this industry leader at a dirt cheap valuation.
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See my original post for more facts and figures.
Disclosure: I am long USG.
See more Housing, Industrials, James Cullen, USG | 
November 18th, 2007 at 2:44 am
good instinct and anaysis…any thoughts on Owens Corning?
trading xbrankruptcy this year … it tracked USG in Jan, Feb even doing a tad better prior to both stocks declines this year.
thanks, and great site.
November 18th, 2007 at 5:23 am
Very quantitative analyses in all different posts. the site deserves bookmarking for regular visits.
November 18th, 2007 at 10:15 pm
[...] And I’ll round out the Festival by saying that USG is a zero-risk investment. [...]
December 20th, 2007 at 12:42 am
[...] Why USG is a Buy at $36 [...]
December 20th, 2007 at 1:35 am
This was a very insightful analysis. I had no idea about all the hidden investment activity. I own USG, but I bought a little bit above where it is currently sitting at now. I am now thinking of allocating more into USG though…
December 27th, 2007 at 8:06 pm
i generally read blogs to understand what i am missing etc. but im not sure this one counts, or why you are being praised. Buy cos Knauf and whitman are buying? I hardly need to go to college for that gem and really since there are loosers in everyone’s book, why is this the purported winner you suggest. i believe this must be the case of fake value investing i heard from klarman. On OC post i definately think that is interesting story but then i also suspect susan cfa knows why its interesting. Everyone is long.
For the record im long USG and just think your reasons just make me want to sell this gem.
December 27th, 2007 at 10:32 pm
Smartass,
There is a lot more to USG that I don’t discuss in this post, its contained in a rather lengthy writeup I did on the company two months back. Drop me an email (jcullen@collegeanalysts.com) and I’ll send it to you.
January 11th, 2008 at 2:33 am
Hey, you guys were pitching USG at $45 a year ago and someone else was commenting, basically, that you guys were nuts! It’s down to 33 today, and I don’t think a turnaround is here anytime soon.
Making a buy just because X, Y, Z super fund managers bought is stupid. Bill Miller and Bill Nygren were both calling the homebuilders a big value play in the middle of last year after the sector tanked 50%. I was short SPF all the way to 50%, and was somewhat scared out of my short position by these guys who were saying that the short was a no-brainer 50% ago, but now it’s looking like a good buy. SPF is now down to 3. Hell, you could have shorted when it was 50% below where I shorted, and still be up 80-90%. That’s also the reason why Legg Mason and Oakmark has seen their performance whacked by 40-50%. Hell, the billionaire who bought BSC in Dec. was giving a huge thumbs up to a value play on it. That was when it went down to 105. Now it’s trading at 78. It doesn’t take a genius to see a bubble forming. Hell, I saw this one a year ago, and shorted. I saw the tech equity bubble in 99 and stayed out of the markets (should have shorted, but wasn’t confident enough).
January 11th, 2008 at 3:44 am
MSG,
I also responded to your other comment if you care to check back on that…
I can’t/won’t speak for Clayton on USG, but my thoughts on the company are such:
I emphasize(d) $36 because Knauf was buying at that price, the stock was holding that mark, AND it is 10x my estimate of USG’s normalized earnings. In the last week, that mark gave in a meaningful way and the stock made new lows. But to say an investment is a failure because I’m down 10% in two months just doesn’t make sense.
I gave a presentation on USG a month back, and explicitly said there is nothing good happening with USG’s business right now. Yet isn’t that the time to buy cyclical stocks?
January 11th, 2008 at 3:06 pm
James,
I concur, being down 10% in two months doesn’t qualify as a bad investment, but just bad luck. And, I admit, I do like all of the positives mentioned on USG, and that it’s trading nearly 50% off its highs, but the fact is, it’s still heading lower. Geez, it’s off another buck today. I think that until the financials and housing sector is completely straightened out, we’re not going to see a turnaround anytime soon in USG.
Although it’s better to be fully invested than not, I just rather stay in cash and buy when I think the economy is turning around… or atleast when the price has stabilized.
Now how about a play on Countrywide? BoA has already said they will purchase them for 4.1 billion in stock. That’s a 8+ percent premium over the midday price of $6.50 that the stock was trading at. When? Supposedly in Q3, but, that is GUARANTEED. It’s a no brainer. I’m in for a large limit order at 6.30. At that price, it will represent a 10% gain.
September 8th, 2009 at 12:47 am
[...] 8. USG @ $36/share: A Huge Bargain [...]
September 8th, 2009 at 1:02 am
[...] - If you want to play a housing rebound, forget the homebuilders, go with this company. [...]
May 19th, 2010 at 10:31 pm
S.F….I could not said it better myself.,lucy