Friday, February 24, 2006

Sherwin Williams - Blood/Paint on the streets

In one of my previous blogs “Martha Stewart and Flu Shots” I had talked about investing in companies that 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. BTW Martha Stewart (NYSE : MSO )is up 200% since its founders legal troubles and Chiron (Nasdaq:CHIR) is up 50% since its regulatory quagmire and is being bought by Novartis.

" 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.– Roger Lowenstein in " The making of an American Capitalist "

Indeed just such an opportunity arose this week, shares of Sherwin Williams (NYSE : SHW) yes 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!! The stock dropped from $53 and is currently trading at $40.77, This reminds me of the tobacco trials, Phillip Morris (NYSE : 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, 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 you know!!

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

More on the details on the fundamentals at Value Discipline Blog. Anyway I think 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, for those who are faint of heart put in a stop loss at 10-20%. I plan to dip my toes in paint later today.

Also of note Eastman Kodak (NYSE: EK) that we talked about last week is up 13% since then, in no small part due to the fact that Bill Miller of Legg Mason has upped his stake to 25%.


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