Sherwin Williams - Blood/Paint on the Streets (SHW)

I've previously talked about investing in companies whose stocks get beaten down because they get into trouble. In the US, thanks to the tort system that often means legal trouble. Wall Street hates uncertainty and institutions dump shares at the first sight of a legal hurdle. As Roger Lowenstein writes in The Making of an American Capitalist, "most of the time the market is efficient and fairly valued. However on occasions there is such disdain for the stock market and there is blood in the street. These are the occasions when the true value players like Warren Buffet make their killing". Just such an opportunity arose this week, as shares of The Sherwin-Williams Company (SHW), the venerable paints company, dropped 20% after a jury in Rhode Island held the company liable for lead paint liability.

This was a second trial, the first ended in a hung jury. Another defendant, DuPont, avoided trial by paying off the lawyers. SHW dropped from $53 and is currently trading at $40.77.

This reminds me of the tobacco trials. Phillip Morris (MO) turned out to be one of the best investments made by deep value players who bought it in the mid nineties.

Yes, lead paint is hazardous, but science has proven this only in the last 20 years, and companies cannot be held liable for what was not known previously. No doubt the verdict will be appealed and saner heads will prevail. The current administration and the federal courts are quite business friendly these days.

The company is solid:
- Strong brands Dutch Boy, Sherwin Williams, Krylon
- Sales of $6.98 Billion at today'’s price a P/S ratio of 0.82
- Dividend of 1.8%
- Annual operating cash flow of $550M

This is a deep value play for someone willing to bet on the company coming out of the legal quagmire. Meanwhile, while you wait it out there is a nice dividend. Although I think most of the blood letting is done, those who are faint of heart can put in a stop loss at 10-20% below the current price.

I plan to dip my toes in paint later today.