Sold out USG – United States Gypsum

It has reached what I consider to be fair value. That fair value has been going down due to the longer than expected (by me) recovery in housing. Since 2007 up until now the fair value of the company has relentlessly gone down due to the years of accumulated losses. But what matters is the price and when I saw it going down last year in August I loaded on stocks and options at what I thought was a big discount. That discount is not present anymore in my opinion. I see this as a high risk company, that is why I only bought it cheap when it was on sale. If recovery takes a bit too long it could need more capital, and that would affect the share price for sure, or it even could, in worse case, go bankrupt.

@ 17.5 it is more than fairly valued in my view, if new home sales recover to the historical average and USG has a gross profit of 600 millions, like it had in 2007, not too conservative assumption, but ok, lets assume that, and take out 300 in SG&A and 200 in interest service then 100 millions remain as profit, divided by 135 million shares (considering Buffett’s + Watsa’s convertibles) you get an eps of less than 1. The stock is more than 17 times that now, and sales have yet to recover…. that doesn’t look cheap to me anymore…. even dangerous to hold… so I sold out.

The problem is that USG has massively diluted its share base and its profits are severely reduced by the much bigger debt interest that in the past. Given the substantially bigger amount of shares, in order to have an eps as it had before in the golden, or should I say bubbly, construction years of 2005-2006 it would have to have much bigger net profits than in the past.

Anyways I’m very happy with the results this company has provided me. With the stocks I made a 30% profit on 340 shares bought in the weeks around August 2011 for an average of 11.59 and sold them mainly now and in the last weeks for a 1167 dollar profit.

With options it was better : 165% profit on 5 strike 2013 Jan calls, bought for 1660 at an average of 3.32 each and sold for a 2734.82 dollars profit when they multiplied by to 2.5 times its original price.

Overall a relatively small investment of 5602 US dollars, due to the risk, but a relatively nice 3901.97 profit equivaling to 70% in 7 months.

Not bad considering that this is the 3rd time I make money with USG, the 1st was in selling in 2010 calls that I bought in 2009 at extremely low prices that basically multiplied by 9 or 10 when I sold, that was a much higher profit with more, but by not much, investment than now. Also funny to note that this has provided me one of the biggest investment returns on a company with falling intrinsic value. That highlights the importance of buying at the right price !

This has been an extremely volatile stock, its has gone down to 5 in 2009, then up to 25 in 2010, back down fast to 11 that same year and again up to 19 in 2011 to again (yes again!) go down fast to 6 and up to 17 now ! Isn’t that a rollercoster that would make vomit most of you ?

Cheers!
jrv

PD: I still hold some USG bonds, Nov 2016, 6.3% coupon, initially bought at 78% of face value, they are now at 94-100 yielding 6-8%, I think they are quite safe compared with the stock.

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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6 Responses to Sold out USG – United States Gypsum

  1. Cory says:

    Congratulations on excellent investing.

  2. Ilia says:

    Hello jrv,
    Interesting posts, I just stumbled upon it. Wondering if you don’t mind me asking, what are your thoughts about TVIX and UVXY? VXX has been in contango I believe since November and VIX futures look not too good. I suspect there will be a change, maybe temporarily but still a change in direction. I’ve been accumulating TVIX and UVXY last two months (sigh…) and wondering what you think about VXX short term.
    Certainly appreciate your comments.

    Regards,
    Ilia

  3. jrv says:

    Thanks Cory ! Don’t doubt to share ideas if you feel like.

  4. jrv says:

    Hi Ilia,

    Here is what I think about volatility and contango lately: http://investing.kuchita.com/2011/08/21/vxx-data-since-vix-futures-avilable-march-2003/#comment-10477

    I would stay out of the volatility market now or at most I would keep a very small short position but I would not be long expecting a volatility spike and I would also not short any considerable amount. At most I would be short a small amount (which I am) and add to the shorts little by little. That’s because I do not bet on a market scare soon and because contango is high. But of course if you think a market scare would come soon then being long on the vxx could make a small fortune otherwise you can be sure contango will erode its value quite fast.

    Cheers!
    jrv

  5. Jarrett says:

    I was not so fortunate. I bought this back in 2007 on the strength of Buffett’s purchase at around $48 a share and someone’s calculation that it was about 60% of its ‘instrinsic value.’ In less than two years, it fell to $4.16 a share and has only modestly recovered. I kept thinking that the market was undervaluing it but with a Price to Book ratio of near 11 and negative earnings and cash flow over a ten year period, it looks like this company is going through a world of pain. This was my first and only stock purchase, and I think from now on, at least 90% of my investments will be in index funds.

  6. jrv says:

    Sorry to hear that Jarret, my first 100 shares purchased were also at high prices (40). I also had bad experiences when I started buying stocks. I think the key is never to invest based on what others say, I now only invest if I am fully convinced by myself after usually quite a lot of studying, otherwise I simply let it pass.

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