Followers of the Covestor Concentrated Risk Portfolio know I have been bullish on the US Housing market for the past couple of years, and USG Corp. (USG) in particular.
In mid-October I completely exited my USG position, which at the time made up a large portion of the portfolio. Although I remain bullish on the long term prospects of the US housing market going forward, my comfort level with USG Corp. changed drastically after the company entered into a joint venture with Boral Ltd. on October 16.
A webcast presentation of the JV announcement can be found here. Under the terms of the agreement (slide 28 in the presentation), USG will pay Boral $500 million, with approximately $350 million being funded with long term debt when the deal is completed.
An additional amount of up to $75 million can be paid if the venture hits certain earnings targets. As an investor who was initially interested in USG because its fortunes were mainly tied to the US housing market, this diversification into foreign markets seems unnecessary and adds substantial uncertainty to the company going forward.
My investment in USG Corp. was predicated on the fact that a strong recovery in the US housing market would result in strong earnings growth for USG. Now that USG has taken on more debt, I decided to exit the position.
The portfolio now has a substantial cash position. Although it is not an ideal situation sitting on such a high percentage of cash, earning no return, it would be a big mistake to make undisciplined purchases to reach for a return.
I will continue to scour for stocks selling at substantial discounts to their intrinsic value; however with the S&P 500 having returned more than 25% YTD as of November 17, opportunities have been scarce.
DISCLAIMER: The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
