Author: Smead Capital Management

Most millennials have never seen an era where value has done well. The last 12 months seem like an aberration in their careers relative to the booming growth markets of the 2010’s. The investors that have witnessed value do well time and time again are more than likely baby boomers, not to count Charlie and Warren out (we never do). However, the silent generation is fewer by the day, though they have seen the tug-of-war in the value-versus-growth continuum more than future generations.

We have been long-term owners of Amgen (AMGN), Merck (MRK) and Pfizer (PFE) among the major pharma/biotech companies. We believe they trade at a ridiculous discount to similar companies in other industries. However, we think we understand why they were underperforming similar stocks and it was a self-inflicted wound. The industry allowed the media to define them as drug companies.

Today’s housing market has done what few people expected and yet, like Rodney, “it don’t get no respect.” Many on Wall Street fear the future of this industry as we’ve risen to levels of homebuilding that we haven’t seen in a long time. Rather than looking at demographics, household financials and other data that points to a very bright future, they just call it crazy. They feel it’s a sugar-high phenomenon. Lastly, they think 50% higher homebuilding from here in the future is impossible. We will look at the data to explain that, as Rodney would say, there is no respect.

Now that investors are reconsidering active stock picking and are especially interested in value stock strategies, let’s analyze where excess stock market returns come from. Excess return, or alpha, comes in four basic ways. Alpha can come from stock selection, selection timing, concentration and long holding periods.