Sunday, July 09, 2006

USG sell off

In the previous article, we looked at USG's business using Charlie Munger's basic principles. In the current article we will look at possible reasons for USG sell off and the road ahead.

While USG's business looks sound, the stock has been on a downward spiral ever since hitting a peak of close to 120 in April.

The stock EXP has had a high correlation to USG. The correlation has gone away of late with USG selling on the cheap compared to EXP.

The possible reasons for USG going lower are several.

1. The lack of a present book value which can help to put a floor on the stock price. The many mutual and hedge funds would start buying based on the cheap stock price.

2. The confusion around rights and bankruptcy hasnt helped the stock. This has caused a more confusion than was expected.

3. People that bought the stock below the current market price of $50 and can't afford to buy the rights are better off selling the rights than buying them. Any one who bought the stock within the year are better of buying the rights or one would end up paying uncle sam ordinary income tax.

4. As expected, if the company is going to execute well, the stock should bounce back to the level where it will correlate with EXP's stock price.

5. Taking the next year's earnings multiple, the shares are worth anywhere from 60-90$ per share post rights. This makes the stocks a steal at $40/share a steal.

6. Since many investors investing in USG have already allocated capital for the rights, these investors aren't adding to their positions. The lack of buyers isn't helping the USG stock price.

Knowledgeable investors with capital to allocate would see the opportunity presented and would add to their positions at the right moments.

1 comment:

Anonymous said...

Your Yahoo chart is misleading, it does not adjust USG properly at the ex-rights dates. Adjusted for the rights offering you will see the EXP and USG correlation still holds pretty well.