We’re in a financial euphoria episode, Bill Smead said. He compares overpriced market situations to “Pedro Sanchez markets,” referring to the character from the movie Napoleon Dynamite, who as a candidate for student body president tells his peers that a vote for him will “make all your wildest dreams come true.”
He appreciates volatility, however.
As Buffett says, “The future is never clear, you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is a friend of the buyer of long-term values.”
Read: “Mr. Market embraces the esoteric” blog.
Uncertainty Creates Our Opportunities
Discovery Communications
Usually Discovery CEO John Malone stocks are too complicated, but he wants strong insider ownership preferably with recent purchases (one of his eight investment criteria). Discovery has munch of insider buying. He sold Scripps, converted it into $17 Discovery, and then bought more at closer to $18.
Malone interviewed in November on CNBC for an hour and explained what he is doing: borrowed money at 3.5% and getting 12% FCF yield at the price Smead is paying to get Scripss.
The company is aggregating different shows. They are completely the dominant unscripted TV company in the world and are better at figuring out what people want to watch than anyone else. The cost of production is 10% of what other companies pay. CNBC, ABC are not much different than biotech companies – they have to keep coming up with winners.
First came networks, and then cable, first to get rural locations, but suddenly people had a lot of choice. It was going to be the death of the networks, and it did reduce the power of the moat, but everyone forgot there are 300 million people in the U.S. and 220 million in 1980. People forget you don’t have to have everyone as a customer. It’s nice to have them, and that’s why Buffett bought Coke, because they were going to “teach the world to sing.”
This business gushes free cash flow. Malone says on CNBC it’s an incredible bargain and buys a lot. Smead does not need to interview Malone personally to know this.
Housing is the normal driver coming out of a deep recession. This is the first time in 80 years that didn’t happen. Only in the last year did it make any positive contribution to GDP. Any company that benefits from the number of 35-44 year old people going to have huge tail wind, and likely the economy will get stronger and rates higher.
Might be the best company in the entire S&P 500, Smead said. It has a great balance sheet and massive free cash flow. It was the first time a major company has started a dividend higher than the 10-year Treasury 3% yield. It has consistent earnings growth and is buying back stock and raising dividends.
It also has the most spectacular drug ever invented: Repatha for cholesterol.
Will save the system money by treating people who would otherwise have more expensive care later in life.
In the last 12 months, it had $3 million worth of insider sales there. People that work there believe in the company and recognize the bargain.
This is a business he would be least shocked for Buffett to buy. He drives by McDonald’s and drives by Walgreens. It’s a fantastic business, PE since 1985, earnings going to grow a lot, didn’t get the tax bump because of merger with Alliance Booth. It will have baby boomers who need medicine.
“I love this one. Gosh I love this one,” Smead said.
This company owns college educated affluent females. Isn’t Walmart a stiff competitor? No, Target’s customer doesn’t want to go into Walmart. Starbucks, Nordstrom, Target are companies that people think about themselves better when they shop there.
Target’s PE last summer was the same as in 2009.
It is hated by analysts.
All companies he mentioned have at least a 20% return on equity.
For entire market cap of Amazon you could get: TGT, JWN, AMGN, DISCOA, ABC,EBAY,TGNA, WBA, CMCSA, KR, AXP.
They have better fundamentals, and Pedro Sanchez’s wildest dreams never come true.
