“Inside Value: 60 Cents on the Dollar”

By Travis Johnson, Stock Gumshoe, October 16, 2007

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?

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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.

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Peter SimpleFRANK  TUCCITriCities RogerAnonymous Recent comment authors

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Excellent report – not sure about Markel though.

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TriCities Roger
TriCities Roger

Speaking of Getty Images, you might be interested in some of the recommendations marketed by Morningstar Growth Investor, as penned by Toan Tran. He hyped Getty some months ago … along with other dead-in-the-water goodies such as Ruth’s Chris. He totally missed two superb growth sectors, both of which have treated me well: Nitrate producers (MOS, AGU, POT, MEOH) who are benefitting from the biofuels boom; and infrastructure contractors (BKR, JEC) who are already benefitting from the funding being allocated to highway and bridge reconstruction after the Minnesota collapse. He also missed VMW’s IPO and subsequent 2.1x runup in price.… Read More »

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Peter Simple
Peter Simple

Check Federal District Court in Salt Lake City for new (2006) non-asbestos litigation against USG. Do some gumshoe work and find the same order of magnitude of potential liability as the asbestos disaster. Ask why it’s not in any annual report.

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