Sunday, November 9, 2014

Norbord: Buy Sell or Hold

I bought some Norbord a short while ago, just before the market began collapsing. At first I had a nice pop and then the stock price weakened. It fell below my entry point and has never climbed back. It hasn't gotten even close.

Now, some analysts are pulling their buy recommendation and replacing it with a hold. When I see the letters h-o-l-d, I read sell. Should I? Should I take the loss and move on. Is there really nothing to see here?

I confess, I like Norbord. One of the biggest producers of oriented strand board (OSB) in the world with 11 operating plants in Canada, the U.S. and Europe, Norbord can pump out 5 billion square feet of OSB a year. Norbord also manufactures medium density fibreboard (MDF), particleboard and furniture. If the market for OSB should strengthen, Norbord has mothballed capacity that it can bring online relatively quickly.

Its announced earning for each quarter this year have surpassed estimates but the spread has been narrowing. Last quarter only a penny separated the estimate from what the company actually earned. The dividend of 10.5 percent, $2.40 annually, is being questioned and a cut to the dividend is anticipated in 2015. Revenue for the past year has been remarkably flat.

My gut tells me the present stock price is under threat. If I sell now, I can buy back at a lower entry point. But, my gut has often been wrong. I need more than just a gut feeling to dump my NBD and move on. I need to know that wherever I temporarily put that money, it will perform better than if I had simply left it alone.

If I have doubts about the dividend, I'm sure many others share my concern. A lot of the damage resulting from a dividend cut may be priced into the NBD stock already. If the fall isn't too great, say five or ten percent, and the dividend is only halved, I will still earn a tidy sum on which to live in retirement. I can ride out the storm.

A look at the fundamentals (key stats, cash flow, income statements) appear to indicate NBD is a successful, well run company in a cyclical market and the cycle is near a bottom. Only the retained earnings number gives me pause. Slashing the dividend should improve this.

Will U.S. housing starts rebound in 2015? Until recently, many thought a recovery was immanent. Now, analysts are tempering their positive positions. If I held a lot of NBD I think I would sell. There should be better places to park my money.

But as I don't hold a lot, I'm going to hold tight. If the price of NBD should collapse, I will give the company fundamentals another look. If all is in the black but under pressure, I may buy a few more shares to push my exposure back to where it was when I first bought the stock. I have no doubt that someday I will sell for a nice profit and in the meantime I hope to be paid for my patience.

(Be warned. I believe NBD has cut its dividend completely in the past. This is a company that appears to have no qualms about touching the dividend.)

One last thing that I should mention: I hold NBD in an account that is presently up 18.25 percent. I hold 32 percent of the portfolio in cash paying 1.25 percent. I'm waiting patiently for a buying opportunity. The bank stock in this account is up about 80 percent at the moment. I am well positioned to be able to buffer any anticipated loss from a drop in the Norbord share price. I can take a 10 percent correction in my bank stock and 20 percent bear attack on my Norbord and still have a profit in the four digits and an annual yield able to meet my retirement needs. There is no reason for a fire sale.

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