I have written in the past about building products and home improvement manufacturer Masco (NYSE:MAS), which is truly a jewel of a business and has been broadly regarded as a quality company for years.
In my previous post, I described the quest that most of us undertake to find a cheaper analog of the company that we really wanted to own but always seemed out of reach. The quality, dependable, high-return company always seems to be too expensive. The lesser quality, less reliable second banana was generally cheaper but unfortunately tended to be a performance laggard. If it's bought at the appropriate price, the second choice sometimes works well, but in your heart of hearts, the better company is generally what you really want to own.
This is one of the great aspects of the market downturn. Fear and phobia dominate the "thinking" of the herd and great companies are cast off as willingly as the truly poor companies.
Horizons shrink. In bull markets, the investment horizon extends forever. Investors willingly talk about companies that have terrific products, competitive advantages, and strategies that extend for years and years. Competitive advantage periods seemingly are extended into the hereafter when the tape is rising. But bear markets shutter vision. The future becomes murky if not opaque. The investment horizon becomes truncated into "looking for a bounce."
Good news is ignored. The elimination of a terrorist such as al Zarqawi elicits not enthusiasm, but new worries about who will rise to power. Had this occurred in a bull market environment, we would see a tape up 200 points afterwards. Ben Bernanke has been transformed from "Helicopter" Ben to Ironman Ben. The attention to inflationary pressures is perceived as almost iron-fisted and maniacal. Either extreme posture is unlikely to occur. Remember the jawboning role of the Chairman of the Fed: moral suasion is different than enactment.
Back to Masco.
On May 10th the company announced a new buyback authorization of up to 50 million shares of its common stock, thus replacing its existing program under which it had 34 million shares of the 50 million completed. The company expects to return a minimum of $1 billion to shareholders on average annually over the next several years. This is no idle commitment. In the last three years (prior to 2006) the company returned $3.6 billion to shareholders. In the first quarter, $408 million was returned.
On January 11th, I had suggested that I felt it was wise to wait for a better entry point. The stock at that point was $30.85.The stock has dropped below $29 today. At this price, the company offers a free cash flow yield of 5.2%. EV/EBIT dropped below 9 times.
(For more information, check out this forum in the Wall Street Transcript. [subscription required])
However, it's exactly at times like this that one can build long term positions for a portfolio. Housing starts will be weaker than what we have become used to. I do not recall a year that they dropped to zero. Ditto for home sales in general. Renovations will also be part of the overall building materials demand picture too.
When markets are weak, they provide a great opportunity to buy quality when it is actually there, not when it might have a chance of developing. Ignore the story stocks and buy what actually has fundamentals.
Bear markets or corrections, whatever this may be, are great opportunities to improve the average quality in your portfolio. Clean out the dreck, cast out the tip stocks that never quite worked out. Build your wealth. We do not currently have a position in Masco.
At these levels, I am thinking that's a mistake.
MAS 1-yr chart:
Disclaimer: Neither I, my family, or clients have a current position in Masco.