GuruFocus had the pleasure of hosting another presentation with Bill Smead, the founder of Smead Capital Management.
The firm says of itself on its website: "At Smead Capital Management, we are stock market investors. Our clients are individual investors, advisors, family offices and institutional investors who invest with the firm through its mutual funds, separate accounts and other investment vehicles. We advise investors that fear stock market failure through a low-turnover, differentiated value discipline seeking great businesses to build wealth."
Prior to founding Smead Capital Management in 2007, Smead was the managing director/portfolio manager of Smead Investment Group of Wachovia Securities. Previously, he was with Smith Barney and Oppenheimer & Co. He began his career in the investment business with Drexel Burnham Lambert in 1980.
Watch the full presentation here:
Smead kicked off the stream with a brief explanation of the overarching idea that he hoped the audience would gather from his presentation. He explained that value stock picking is just getting started and that the pandemic has created fears of economic optimism that will drive the market in the near future.
The first section of his presentation dove into the opportunity at hand that value investors should be seeking to get a piece of. He showed a chart and explained that the pandemic drove prices down to almost the same level as seen after the tech bubble of 2000. This has created a great opportunity for value investors to find companies that have low prices and can be held for long-term profits.
He continued to explain that the amount of companies trading at high price-sales ratios have increased dramatically in the last year. Compared to value stocks, these “growth traps,” as Smead described them, can be much more punishing when they perform badly. These growth traps are seen throughout the S&P 500 and, in his opinion, set investors up for the potential for poor performance over the next five to 10 years.
After establishing sections of the market to avoid, Smead took a look at value opportunities that he sees in the market. He first looked at the millennial generation coming into its adult, home-buying phase in the next decade, which will be a key driver for the economy. These millennials will increasingly dump money into different sectors at much higher levels than seen by the previous generation.
Another opportunity comes from the energy sector. Smead was adamant throughout his presentation and his responses to audience questions that the transition to cleaner energy is likely to take upwards of 20 years to complete. He believes that supplies have been beaten down and the fact that demand will remain will drive oil prices upward in the future.
The final sections of Smead’s presentation looked at opportunities that he sees from homebuilders, medicine and banks. Each of these offer unique opportunities where demand and the increased economic activity from millennials will drive value after recent declines.
Smead used several different companies that he likes as examples for the different opportunities he sees throughout the market. In the homebuilders section of his presentation, he looked at both Lennar Corp. (LEN, Financial) and D.R. Horton Inc. (DHI, Financial). The price of these types of companies have been driven to some of the lowest levels seen in the past five years due to supply shortages. Should millennials buy homes like their parents, homebuilders will have a massive amount of demand moving into the future.
One interesting question came in from the audience that asked Smead what the one investment he would make would be if he could only own shares of one company. He immediately laughed and accused the audience of planting a bug in his office because it is a discussion he regularly has with his team.
Overall, he continually lands on Amgen Inc. (AMGN, Financial) and asks his team if he should just put everything into a single investment. The fear of placing everything into a company that makes medicine is that they have to continually create great products to keep making money. He looked to a company like Apple Inc. (AAPL, Financial) for comparison with a company that has to regularly innovate new products.
His analysis shows that Amgen generates comparative returns on equity to Apple and maintains a similar balance sheet. However, Amgen trades at a dramatically lower price-earnings ratio and seems like it would be a wise choice for a single-position portfolio.
Another question asked Smead if he believes that streaming services will run out of viewers as new services continue to be offered. He explained that he believes the near future will see many of these companies fail if they cannot remain competitive.
He continued to say that streaming services have to offer either the best system or the best content to truly captivate the audience. Content is very expensive for companies to produce, so those that already maintain exceptional libraries are positioned best to succeed as a streaming service.