USG: Hold On Tight For the Upside

| About: USG Corporation (USG)

It happens so often that one buys a stock for the right reasons but sells them for the wrong ones. I make that mistake frequently, but with USG Corporation (NYSE:USG), I am going to keep reminding myself why I own it.

Here is a stock that is practically flat since last summer, while the rest of the market has seen a significant move up. In December, the stock finally hit $58, up from around $45 in summer, only to fall back to $52 by January even in the face of positive market momentum. By February, USG hit $58 again but the market declines pushed it down to that coveted $52 level. Just when one would have expected the stock to stabilize for the next move up, the company frustrated investors by making a share offering of some 8 million shares at $48.60, so guess what, the shares are now at $48.60.

Normally, this kind of behavior is reason enough for me to sell, and I often kick myself for doing so. This time around, I have actually written myself sticky notes and stuck them to my monitor to remind me why I own this stock.

The company is doing the share offering to pay for an acquisition that will allow it to expand operations on the West coast. This is a good move for USG and it is clear that management is thinking more of the long-term than the short. They are also going to use their $1 billion tax return to pay down debt. It is no surprise that Warren Buffett owns 19% of this company and with his cost basis at around $45, we are not far from there he bought the stock.

Additionally, we can rest assured that by pricing the new offering at these levels, that the stock is unlikely to go any lower. Therefore, we have a good long term bottom here. And keep in mind that this offering, much like an IPO puts the price of the stock lower than what its worth, so that the firms brokering the deal and investors who finance the offering are guaranteed a profit soon after.

I believe USG is a good bet for the long term and it won't be long before the stock hits $58 again.

CORRECTION: It has been brought to my attention that this post contained some incorrect information. I mentioned that Buffet's cost basis was $45. The fact is that his cost basis is a lot lower. Buffett acquired majority of his stake when the company was emerging from bankruptcy last summer.

However, this does not change the point I was making, because he did acquire over 1 million shares on the open market at just under $46 last year. This reflects his conviction regarding USG. Despite owning the stock at much lower levels, he increased his cost basis by buying on the open market.

My apologies for the misinformation, but I maintain my position on the stock.

Full Disclosure: I own USG for my portfolio but my position can change anytime without notice.

USG 1-yr chart: