Oakmark Select's Nygren Dumps USG, US Industries

Does Bill Nygren know something that Warren Buffett doesn't?

Maybe so. According to documents filed with the Securities and Exchange Commission, Nygren has sold nearly all of Oakmark Select's (OAKLX) shares in building-products firm USG , which has been one of only a handful of weak picks in the fund. Nygren's move comes just a few months after it was revealed that value-investing guru Warren Buffett had taken a significant position in the firm. Oakmark's SEC filing also revealed that Nygren had completely liquidated the fund's position in US Industries , which has been another rare miss for Nygren.

USG's stock has performed abysmally over the past few years, as asbestos-litigation worries have taken a toll on its shares. USG has delivered an annualized loss of 28% over the past three years. According to the SEC filing, Oakmark Select owned just 254,800 USG shares as of February 28, 2001. On December 31, 2000, the fund owned nearly 3.5 million shares in the firm, and as recently as March 31, USG was Select's second-largest holding.

Select is a very concentrated fund, with only 15 to 20 holdings, so Nygren doesn't keep small positions in it. If he hasn't already liquidated USG completely, it's likely that he soon will.

Although it's a sizable company, with well more than $3 billion in annual sales, only a few dozen funds own shares in USG, and most have tiny positions or are index offerings. Among funds with sizable stakes in the firm, according to the most recent portfolios filed with Morningstar, are a handful of terrific value offerings, including Select, Longleaf Partners Small-Cap (LLSCX), and Third Avenue Value (TAVFX). However, Marty Whitman, the manager of Third Avenue Value, recently told Morningstar that he had made a mistake buying USG's stock and instead favored its bonds. "I don't think now that anybody can get their hands around what ultimate asbestos liability will be," Whitman said, pointing out that the bonds offer a high yield and better protection to investors than the stock, in the event that litigation against the company is successful.

Longleaf Small-Cap was also among funds with significant stakes in U.S. Industries. That company, which makes Jacuzzi and Sundance spas, has been in turnaround mode for years now. Like USG, it had been a significant position for Select for more than four years, at times accounting for more than 10% of assets. On a number of occasions over the past few years, U.S. Industries has announced disappointing operating results, including for its most recent quarter. The company also recently disclosed that the spin-off of its lighting division, which was part of its ongoing restructuring, would not occur on schedule. The stock has been roughly flat so far in 2001, but it has lost more than 20% of its value in each of the past three calendar years.

Although USG and U.S. Industries haven't been among Nygren's best picks, shareholders don't have much to cry about. Since Select's inception, its returns rank among the best of any value fund, including a gain of more than 40% over the trailing one year. Moreover, Nygren pays close attention to taxes, recognizing losses when he has the opportunity, and his sales of USG and U.S. Industries will have benefits for shareholders in taxable accounts.

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