Stock Gumshoe

This teaser came in recently for the Motley Fool Inside Value newsletter — the main company they’re teasing as the “next Berkshire Hathaway” hasn’t changed over the past couple years that I’ve been seeing this ad (it’s Markel, as I’ve written about before, and I do own shares of that one), but the secondary teaser companies are new.

Part of the sell for this newsletter, as for many, is that they churn out a couple new picks a month, and in this particular ad they do mention the two most recent recommendations — or at least, they give us a few clues:

Just to be clear, this is strictly a value investing service that the Motley Fool runs, and their time horizon is usually pretty long as they plan to hold their stocks for many years … so I wouldn’t rush out and buy anything just because it’s a “fresh” recommendation from Philip Durell — even if he does know what he’s talking about with these investments, there’s no particular reason why they should shoot up tomorrow.

So … what are Philip’s “top two picks” for your next investment? I’ll tell you about one of them shortly, and the other one in a second post as soon as I get around to reading a little bit more.

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“The first is heavily owned by a fellow commonly called “the world’s greatest living investor.” But you have the rare opportunity to get in MUCH cheaper than he did — at about 60 cents on the dollar, according to Philip.”

That’s a reference, of course, to our friend Warren Buffett, and Philip claims that you can invest in this company for 60 cents on the dollar, at a much lower price than Buffett paid.

They have “an absolute stranglehold on a critical, and profitable, commercial market.”

This company’s industry got caught in the market downdraft, but “Philip assures me this is nothing but a short-term blip in an irresistible long-term trend — one driven by a powerful demographic wave.”

So what is this company that you can build a position in “on the cheap” right now?

Pretty much has to be USG (USG).

Buffett does own just about 20% of the company, and it’s the only one of the companies that he has similar size positions in that could be described as in the dumps at the moment — he has some big railroad holdings that he has acquired recently, too, for example, but they’re certainly not well below his buy price right now. This one was teased in the Spring as “Buffett’s Secret Loser,” too, if you’re interested in reading more.

USG, the big wallboard maker, has definitely been hurt by the decline in residential construction, and certainly at least tarred by proximity with the subprime brush at the same time. The shares are down something like 60-70% from their highs in early 2006, and they have had trouble with asbestos lawsuits to add on to their reliance (at least in the eyes of many investors) on a strong residential building market.

I don’t know whether USG is going to suffer dramatically because of the business they’re in — I do know that Buffett kept on buying as the stock went down last year, so he sees something he likes, but he also might have much more patience than you do for a stock that could possibly be pretty moribund for a couple years. It is certainly not cheap based on trailing earnings, the PE is under 10, but I think there’s probably a lot of uncertainty about next year’s earnings. And while they are profitable, the profit margins have decline significantly from the rather high levels they enjoyed last year.

The company itself has said that they see housing weakness for “multiple” years into the future, and it’s worth noting that about half of their sales are gypsum/wallboard, and about 10% of their sales are to fellow struggler Home Depot. The shares fell dramatically over the Summer when they released their earnings and their pessimistic analysis of the housing recession, and have more or less languished in the $35-40 range since then. They certainly seem to be in survival mode, cutting staff and capacity to weather the lean years.

I have no idea whether the dark days will end next year, or next decade, or ever, but it’s not every day that you can say you bought something at a cheaper price than Warren Buffett — that’s saying something. On the other hand, Warren Buffett has made plenty of mistakes in his gloriously successful investing career, too — just ask him about US Airways someday.

This one is actually a teaser for a free service — but the Gumshoe doesn’t discriminate. It’s from Investment U, and it’s teasing us with the name of Warren Buffett’s secret portfolio holding, the one that he bought low and averaged up over the years, and recently piled on more shares of after the shares cratered.

Wow, that’s some bad grammar. Sorry.

And now that we’re still in the euphoria of another “Woodstock for Capitalists” as the Berkshire shareholders head home from the annual meeting, this seemed like an appropriate teaser to take a quick look at.

Nothing is noted about the business or the stock, other than to say that he bought it when it was under $20 and earlier “this year” it “traded up to $120″ and then fell 58%.

He has been adding millions of shares as it fell, apparently.

So what’s the stock?

Buffett only has a few companies that have traded near $120 in the past year or so — including PetroChina, Posco, and M&T Bank. And some of the railroad companies he’s been associated with have also flirted with triple-digit share prices.

But the only one that has neared that price, then fallen dramatically over the last 12 months, accompanying increasing Berkshire purchases, is USG Corp.

And this is really no secret at all — the financial press was all over it when Buffett picked up a big chunk of shares in USG after it cratered (and he did own some shares prior to that), with equal parts claiming on one side that he was bats for buying in the face of a housing downturn, and on the other that he was prescient for finding a value-priced gem that everyone else hated.

The decline from near $120 to the mid-40s was extremely fast last year, but since then the volatility has really died off — the shares fought their way up to near $60 for a little while, but are now back close to where Buffett was buying it hand over fist in the mid-to-high $40s ($48 as I type this, $46 when Buffett really started piling on extra shares last summer).

So … there’s Buffett’s secret, to the best of my sleuthing abilities. Looks like the jury’s still out on this one, but you can buy it for near the price Warren was willing to pay today if you want to. Of course, I don’t know if he’d buy it at this price today, or if you should.

Enjoy. And if anyone did sign up for this “free” service, feel free to let us know if I’m wrong (or right … make that, especially if I’m right).