Author: Cole Smead, CFA

Shell (SHELL NA) announced this week that they are acquiring ARC Resources (ARX CN). Arc Resources is a gas business in the Montney Region of Canada and is a name that the investors of Smead Capital Management are fairly familiar with. For our investors who aren’t familiar with this region, it’s often referred to as liquids-rich, meaning that there is great ability to extract natural gas liquids (NGLs) from wells there. When they get gas from those wells that don’t have a pipeline to get out of the basin, the gas sells at the local AECO price. When they get NGLs out of those wells, they sell at a price similar to WTI. If you’re reading this, you should be thinking, “Wait, so gas companies in the Montney aren’t in the gas business?” No. They make most of their money from the oil prices, like WTI. […]

Relying on the kindness of strangers has never been a good business or investment strategy, but it doesn’t mean that people don’t wish that it worked. The main issue with this hope is that it’s foolish to believe that other people’s grace and money will always be there. […]

While there has been a lot of controversy around the Trump administration’s policy toward the Federal Reserve recently. What is less obvious to most investors is what they’re aiming to accomplish. Trump continues to talk about getting rates lower, and this has been echoed in other parts of the administration as well. He has also talked about rates affecting housing. Let’s unpack the Administration’s reasoning and goal. […]

Investors have talked a lot about the Buffett indicator since the Oracle of Omaha began commenting on it. Buffett compared the market cap of the US stock market to GDP. Assumably, he uses it as a long-term indicator of the attractiveness of overall stock prices. While we have other favorite measures, like the St. Louis Fed data on equities as a percentage of US household financial assets, there are plenty of disturbing aspects to Buffett’s data. The Buffett indicator sits at roughly 217% today, the highest ever. […]

A wise man once said that generally accepted accounting principles (GAAP) is where you start. It may not be the most economic way of looking at a business for various reasons. To look back at how investors could be affected by this, we always recommend “Quality of Earnings: The Investor’s Guide to How Much Money a Company is Really Making” by Thornton L. O’Glove. The author walks through multiple examples of situations where he believes investors should make adjustments when analyzing financial reports. […]

The investors of Smead Capital Management believe, which we count ourselves among, that energy stock valuations in the stock market have become too depressed. Mr. Market gets scared, as he does from time to time. This can go on for a while, but we have seen a couple of private transactions in two different parts of North America energy markets that explain how attractive the pricing is for the assets that Mr. Market could own. […]

We want to ensure our investors know that we are standing side-by-side with them, as the stock market can do fairly illogical things from time to time. We’d like to discuss our three worst-performing securities in the US portfolio to help our investors understand why we are sitting on our hands and allowing our discipline to proceed. We are pounding the table at the opportunity within our grasp and wish to assure investors that we like what these circumstances are giving us. We believe they will guide us toward the successful outcomes that we have seen time and time again. […]

When you grow up with a father who worked in the brokerage business, you hear a lot of stories. The especially interesting ones are those about the investment business in the 1980s. Many times, my dad, Bill, has told me about Jack McCarthy, who ran the Affiliated Fund at Lord Abbett & Co. in the 1980s. At that time, the podcast of the era was sending a recorded tape of your thoughts to get the word out to investors. In 1984, Jack’s wisdom and recommendation were timely. […]

[…] We believe the market has adapted to quality. Even the value players have adapted and most of them have attached quality to their marketing materials. The style has been adapted and we believe the next era won’t reward quality as it has over the recent past. In markets, we believe the winning hand moves around the table just as it does in poker. Luckily Buffett continues to adapt his play lately by selling Apple and buying OXY. The way we see it, the future winning hands look cheaper and more cyclical, but provide attractive returns on capital for the business in his view and in ours.

As the investors of Smead Capital Management know, we focus on the shareholder friendliness of the businesses we analyze because we believe it can differentiate their long-term returns. Warren Buffett has said, “Own a business a five-year-old can run. Just in case one does!” In today’s piece, we would like to share our framework of thinking about capital allocation and shareholder friendliness through an example that we have lost money on so far. […]