Sunday, July 30, 2006

USG Quick Review

We looked at USG in a series of articles in this blog. USG is an interesting case study for securities for many reasons. It is a value stock that emerged from bankruptcy while its shares were still trading. USG is a dominant player in its market. USG is doing a rights offering to put asbestos litigation behind it. The USG shares are backstopped by Warren Buffett considered by many to be the greatest investor in the world and it is a value stock to top it.

USG is also interesting because of the large gyrations in its stock price. The price hit a high of $80 ( rights adjusted ) and has seen a low of $45. The price has dropped about 56% from its highs to the current price level. It would take about 75% gain in the current prices to reach its previous high.

First, let us look at the current situation. Looking at the comparison between EXP and USG in the past six months - they correlate for the most part but for the most recent period around rights. The following link shows the comparison chart between EXP and USG. From this chart, it is clear that USG has atleast about 10% points to make up with EXP with everything else being equal.

Next, let us look at short interest. EXP has a large short interest with about 10% of all the outstanding shares being shorted. USG's short interest has declined some what from the 10% range to the 7-8% range. Compared to regular home improvement stocks like HD and Lowes, the short interest is very high in EXP and USG. HD and Lowes have 2-3% of their shares shorted. Both USG and EXP compare favorably to ( 35% short interest ) from a short interest point of view but look terrible against Microsoft which has < 1% short interest currently. The short interest is interesting in short term trading for only one reason - it shows the general market sentiment against the stock that may cap its short term gains. Another factor that may play against USG in the short term is the increased float. The people that have exercised their rights ( including the author ) havent yet seen the new shares in their account yet. The moment these shares show up in the account in the next week or so - it should bring more sellers to the market. This can put more downward pressure on the stock unless there are more buyers in the market.

As we found out in another previous article, the long term prognosis for USG looks good. The demographic trends favor USG as they do the home improvement stores such as Home Depot and Lowes. As any value investor can vouch, it is important to get into a stock when everyone else is fleeing. The next few weeks will likely provide a good opportunity to get into USG at attractive prices.


Anonymous said...

Your chart does not adjust USG for the rights offering, so the gap down from June 30 to July 3 is leaving you with the false impression that the two names are not correlating and that USG has "ground to make up". This is not accurate.


Anonymous said...

RE: chart of EXP vs. USG: I think that you are interpreting this chart wrongly. It appears to me that the price of USG has not been corrected for the rights. Hence the 1-day price drop associated with the distribution of the rights (from a price of about 70 to a price of about 55 if I recall correctly) adds about a 20% drop that ought to be corrected. With this correction, it would appear that EXP has dropped 10% more in price than has USG over the past 6 months.

Anonymous said...

A drop from $80 to $45 is a drop of 44% not 56%.