USG Corporation is a global manufacturer and distributor of building materials. From gypsum wallboard and ceilings to tile and flooring, the company produces products for the new construction, industrial, and repair and remodel end markets, via Morningstar
As you can see USG has lost money 8 out of the last 10 quarters. However, it does look like the company started turning things around in 2012 when they finally started turning a profit.
While the interest expense hasn’t grown too much, it still has steady growth that should have any investor feeling uneasy.
The coverage ratio is on a steady rise.
The stock market has marched higher since November of 2011 with a few minor corrections and one major correction. During that time period every peak in the MACD indicator has peaked lower than the previous. This is a sign of momentum slowing, take a look!
I’m not calling for an immediate drawback in stocks, but I can say the overall market is a little extended. I believe a lot of investors are going to wait until the end of the election before moving the market drastically in one direction.
Now lets take a look at USG.
USG has continually marched higher since the beginning of 2012. The MACD high spikes have been stable throughout this time. Take a look!
USG is in huge financial trouble and this technical chart isn’t bullish or bearish. However, the overall market is looking over bought at this point. Unfortunately I could not determine when exactly USG collects revenue for their products and services. The real estate manufacturing industry is very cyclical and I believe that while the general direction of real estate is up, the revenue USG produces will not be enough to return this company to their former glory. The hot real estate market of 2005 – 2007 is far in America’s rear view mirror and will not be returning anytime soon. With that said, I believe the resolve of new investors will slowly deteriorate over time as USG continues to disappoint. Take a look at USG’s quarterly earnings schedule:
- October 18, 2012
- Feb 2013 (estimate)
- Apr 2013 (estimate)
As I said before I do not believe investors will be willing to hold onto a sinking ship two quarters in a row.
Therefore, I am going to place a bear call spread on USG that expires in February.
To do this, I will do the following:
Sell the February 2013 $22 Calls of USG @ $3.10 >>> Total: $310 (Premium Received)
Buy the February 2013 $23 Calls of USG @ $2.65 >>> Total: $265 (Payment for Option)
This results in what is called a NET CREDIT of $.45 >>> Total: $45
1. If USG trades below $22 on Feb 16, 2013
Keep the option premium of $45
- + $45 Option premium (Net Credit) received
- +$45 per contract
2. If USG trades above $23 on Feb 16, 2013
Both calls will expire “In the Money” which would require me to do the following:
- Buy 100 shares of USG @ $23/share = $2,300
- then turn around
- Sell 100 shares of USG @ $22/share = $2,200
- This will result in a loss of $100 per contract
- + $45 Option premium (Net Credit)
- – $100 Capital Loss
- -$55 loss per contract
So in short I’m RISKING $55 in order to MAKE$45. Which is an 81% return on my money in 5 months!
This is my first time analyzing a company for a short candidate and initiating a bear call spread.
Let’s see how it goes, cheers!