by Serge Berger | January 3, 2014 8:39 am
On Thursday, an SEC filing showed that world-renowned investor Warren Buffett’s Berkshire Hathaway (BRK.B) converted a part of its debt holdings in building materials stock USG Corporation (USG) into more than $600 million of common stock. However, while the news failed to significantly budge the USG stock, this company’s charts still look juicy.
In 2008, in a collaboration with Canada-based Fairfax Financial, Berkshire bought $400 million of convertible senior debt from USG. The details of the private placement at the time included a 10% coupon, which is a deal structure similar to other deals that Berkshire Hathaway did. As a result of the debt conversion into stock, Berkshire now owns just around 30% of USG stock, or more than 40 million shares.
To be clear, Berkshire Hathaway has had a long-standing relationship with USG, being a shareholder of the company since 2000, thus the debt conversion is likely a vote of more confidence in Berkshire’s position.
However, as a result of the news out of the SEC filing, USG stock (somewhat surprisingly) barely moved in Thursday’s trading, finishing higher by just 0.11%.
But on the charts, USG stock looks juicy.
After the stock cratered into its early 2009 lows, it bounced along with the broader stock market, but in May 2010, it quickly found resistance around the $25 mark and again began to trade lower. The pattern USG stock then began to trace out is one I have noted on countless equity charts. Namely, USG sold off to an important higher low, which took place in October 2011. As the broader stock market volatility in the autumn of 2011 began to subside, USG stock managed to get back on its feet.
Whether USG developed a double bottom or a marginally higher low vs. its 2009 lows isn’t important in the greater scheme of things. What is important is that USG stock, in October 2011, tried to retest the 2009 lows in some fashion, which then acted as a springboard to run the stock higher.
Next, USG stock moved to an important high in February 2013, which then drew a clear line of resistance. The stock then settled into a multimonth consolidation phase, and now, with its recent rally, looks ripe to run higher and past resistance.
On the daily chart, USG stock since July held a great line of support, and each time the stock touched the line, it bounced strongly, in a sign that real-money investors were keen on buying the dips. With the late-December rally, USG once again broke above its 50-, 100-, and 200-day simple moving averages and most recently began to marginally break past its diagonal resistance line dating back to 2008.
From here, while USG stock could consolidate some in coming days, it looks good to move toward the $30 mark as a next upside target.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.
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