Walk Away From the Wallboard

Twenty-seven months have passed since I urged investors to run away from all investment exposure to the residential construction market, and periodically I've reminded you to keep up the pace.

By now I hope you've jogged more miles than Forrest Gump, and you must be tired. Perhaps between breaths you've wondered whether it may now be safe to pull up a chair and kick up your feet in construction-related investment vehicles. As a value hound myself, I can appreciate the temptation to ease into a trampled sector and await recovery.

I've taken that approach myself over in the dry-bulk sector, where I sit patiently with a stake in Diana Shipping (NYSE: DSX  ) while I wait for an epic oversupply situation to correct itself. But whereas a strong case can be made for the growing global commodity demand that will hasten a return to balance in the dry-bulk market, I cannot say the same for housing -- which is why I want you to keep walking away from the wallboard.

Gypsum giant USG (NYSE: USG  ) walked into yet another decline in sales for the fourth quarter, posting a $95 million operating loss. Industrywide wallboard shipments in the U.S. dove another 6%, dropping to levels not seen since the early 1980s (when the U.S. population was lower by about 80 million people). Sober in its own assessment of near-term prospects for growth, the company anticipates 2011 will be "another difficult year."

As if on cue, homebuilder D.R. Horton (NYSE: DHI  ) kicked investors on the shin with a deeper loss than analysts had forecast. The company cited a laundry list of challenges that I trust will serve as further disincentive for Fools kicking the tires on this or related stocks, including: "rising foreclosures, significant existing home inventory, high unemployment, tight mortgage lending standards, and weak consumer confidence." When you're three or more years into a bear market, and even the analysts are unsure about the "ultimate duration and magnitude" of the downturn, then you may be well advised to walk right past the sector entirely.

CEMEX (NYSE: CX  ) will report earnings next week and is also expected to post another loss. While cement demand may not be as highly correlated with residential construction as USG's wallboard, CEMEX's enormous debt burden combined with exposure to deeply stressed European economies like Spain makes this another stock to actively avoid in this Fool's view.

I don't mean to suggest that a Fool can't book a gain in these stocks. On both a one-year and a two-year chart, in fact, shares of USG are actually outpacing the S&P 500. Sadly, we cannot say the same for builders such as PulteGroup (NYSE: PHM  ) and Toll Brothers (NYSE: TOL  ) . I merely wish to suggest that sectors with far more favorable demand scenarios exist wherein a Fool can stroll more comfortably.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Diana Shipping. USG is a Motley Fool Inside Value pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy makes its own wallboard out of papier-mache.


Read/Post Comments (2) | Recommend This Article (8)

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  • Report this Comment On February 02, 2011, at 5:52 PM, Mary953 wrote:

    There was a point, before the housing markets went south, that Cemex was highly recommended, especially with all that construction that would be going on in China.

    Another example that Buy and Hold really means Buy and WATCH. There are precious few safe easy invest and forget ideas out there.

  • Report this Comment On February 03, 2011, at 12:53 AM, FrankDip wrote:

    There are a couple of aspects that we need to remember when we talk about USG.

    1. The Buffett Put - Berkshire Hathaway owns 16.6% of the company

    http://finance.yahoo.com/q/mh?s=USG+Major+Holders

    2.) Although I am too lazy to look up the details if you look in the USG annual report you will see that Buffett has in addition to the shares he owns loaned money to USG & has warrents he can convert into additional stock.

    3.) Berkshire is restricted by USG into increasing their investment, however that could change if USG ever encounters any finacial difficulty. If given the opportunity IMO BRK would buy the entire company.

    4.) If the population of the U.S. keeps growing people will need a place to live. Today we have a pent up real estate demand situation.

    5.) I am betting that wherever people live they will have walls & since USG is the dominant player in the space they will have USG walls.

    Be patient & you will be well rewarded in owning this company.

    Disclosure: I own a greater percentage of this company then any company I have ever owned.

    Frank

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