Editors' pick: Originally published Jan. 7.
There are times when investors need to look beyond income and consider dividend-free shares that promise outsized growth, to ensure a balanced portfolio. When iconic investor Warren Buffett picks up stocks like the two highlighted below, you know it's probably wise to follow in his footsteps.
Let's talk about two mid-caps and decipher how they found a place in the legendary investor's portfolio.USG data by YCharts
USG is a manufacturer of wallboards and other products for interior walls and ceilings. To that extent, the over 110-year-old business is dependent on the volatile residential and non-residential construction environment.
Trading at less than 9 times earnings, USG is clearly a value buy. Consider its peers, Deltic Timber (nearly times earnings, mostly because of faster growth), Masco (15.4 times) and Louisiana-Pacific (19.1 times), which all trade at higher valuations.
Analysts have suggested for USG a more than 44% rise in earnings a share (EPS) for the December 2015 fiscal year. Additionally, they project a 25.20% EPS growth per year for the next five years (double the pace of industry).
Berkshire Hathaway (BRK.A) is USG's biggest shareholder. It was Warren Buffett who helped USG and a clutch of other firms with financing in 2008-2009. USG survived the recession, at a time when the U.S. economy was on in a downward spiral and "housing" was an unmentionable word.
The economic situation today is markedly better. Overall U.S. construction spending should witness solid growth across 2016 (in particular for the private residential and commercial construction markets), and USG is well placed to leverage the positive ascent.
As you adjust your portfolio to improving economic conditions, it pays to follow the investment lead of Warren Buffett and his Berkshire Hathaway. According to a company presentation, USG now occupies the number one market position in the wallboard, surfaces and substrate products space in North America. USG's ceilings business ranks number two in a consolidated industry and its distribution arm at the top for the U.S. specialty distribution sector.
USG's strong market position in all of its core businesses, robust brand recognition, large manufacturing network and sizable gypsum reserves have reinforced its formidable standing in its operating markets.
USG has improved its leverage, fortified its liquidity scenarios and boosted free cash flow generation. For the 12 months ending Sept. 2015, free cash flow was $130 million (compared to $41 million during 2014) and against figures in the negative for 2010, 2011, 2012 and 2013.
Analysts covering the stock have a 12-month median target of $28, a nice 15.6% rise from current levels.