One aspect of my investing experience I feel I don’t talk about enough is the Boston College Investment Club (BCIC), where I am the Portfolio Manager. With 35 positions totaling about $200,000 and a very democratic process, being nimble is difficult and while that’s frustrating at times, overall we do well. There is always the possibility that a stock lingers in the portfolio too long, and if a position is down substantially there is a bias toward eliminating it, which is especially challenging in a year like this. Starting in October 2008, I tried to address this by creating a re-evaluation pitch format, where specific existing holdings that were down were either sold completely, or brought up to equal weight. The early results have been good, and the process has been adopted by others – something I hope continues, as it reinforces forward-looking thinking and creates a rebalancing discipline.
One stock I did a re-evaluation pitch on in mid-February was building materials company USG Corp. (NYSE:USG), which reported earnings earlier in the week. As would be expected, the headlines numbers were not pretty, as the company continues to struggle with arguably the most difficult housing market conditions ever seen. Two positives: even with higher depreciation and interest expenses, USG has rationalized their cost structure to the point where year-over-year operating income isn’t falling. This stems from a combination of cost savings and the big boost from continued increases in realized wallboard prices, which bottomed in Q1 2008 at just over $104/msqft, and are up more than 15% year-over-year to over $121/msqft for the most recent quarter. Improved pricing comes even as end-use customers are under pressure, and industry capacity utilization is still anemic in the low 50% range.
The trend of price improvement in the face of deteriorating demand also holds for the ceilings market, and I continue to worry that selling prices will hold closely enough to cash costs that capacity will not be taken out, and low return-on-investment metrics will persist across building materials for some time. USG’s management will not name specifics, but they have been giving up market share during the downturn – the figures are a little fuzzy for the industry as a whole, but market share during the peak was about 31%, and that is now down to the low 20% range. On the whole, the conference call was not as encouraging as the transcript might read– they still expect housing to be very soft into 2010, and commercial real estate to suffer until credit markets normalize.
