Friend buddy pal Todd Sullivan has been positive on Sherwin-Williams (SHW) for the last few months, and I think the stock fits in nicely with my discussion yesterday of where you need to be looking out six months or so to be ahead of the curve. In that article, I discussed four rather un-cool tech stocks (http://collegeanalysts.com/?p=223 although Cisco – CSCO – found 248 million backers today) that are sizing up to be the next plays after we see some value realization in the retailers, financials, and some of the housing-related stocks.

If you’ve read previous articles – particularly my USG stock report – you know that I’m positive on at least some aspect of housing. Still, USG’s primary value-add is in the middle of a home’s production, so there will be some lag between a pickup in housing starts and a noticeable increase in wallboard demand, but I’m not particularly concerned about that given my time frame.

So where does Sherwin-Williams fit in here? As a supplier of paints and coatings, Sherwin is going to be levered to the end of the homebuilding process, and that is why the stock is getting no respect even as the company posts very solid results in a tough macro operating environment.

Put more simply, I think Todd is just too early here. Right now SHW trades at 12x EV/FCF, when it probably deserves closer to a 16-18 multiple in a normal environment. That multiple on Sherwin’s current results gives you a stock price north of $75, and again, this is for a company still targeting low double-digit growth in the coming years. Note that $75 price is just above where the stock was in mid-July 2007, just before SHW hit its current rough patch:

I realize that Todd will vehemently argue against the idea that Sherwin-Williams is a “housing stock” – just as I did with Bed Bath & Beyond (BBBY) – and SHW did participate in the everything-retail-and-housing rally in mid-January, but I continue to see investors having a lack of enthusiasm for a late-stage stock, when the early-stage ones are just beginning to take off. This isn’t to say you shouldn’t buy SHW at the right time and price, I just don’t believe that combination is properly aligned at the present.

I do, however, have another stock with a housing tie-in that looks interesting here, although I’m still debating the ultimate effects of the company’s segment breakdown… and waiting to see how earnings turn out, as they report tomorrow. This one has several moving parts, but should I get my desired reaction (panic!) it will make for a very interesting analysis, especially at a marginally lower price.

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This article is part of the 75th Festival of Stocks.