Author: Smead Capital Management

[…] This got us thinking about business models and how profitable they can be. These companies are in e-commerce and have had the state governments of the U.S. shut down most of the physical locations of their competitors. The last three months were effectively two Christmas selling seasons spread from late winter into spring. Why is one of these business models responding so well to these circumstances? How profitable have these two platforms been in the past? Why does eBay sell for such a steep discount to Amazon? […]

The oddity of today’s stock market is exactly what any God-fearing value manager should pray for. There are very few scenarios in the last 50 years that can be used to model or forecast what is currently going on. We are strong believers in Mark Twain’s saying that, “History never repeats itself, but it rhymes.” While you can’t precisely forecast the future, the rhymes of past eras can help provide a mental model to produce potential outcomes to help us as stock pickers. Our model for thinking about today’s circumstances is the inversion of what took place in 1972, matched against the opportunities available in 1974.

At Smead Capital Management, we believe one of our competitive strengths is the ability to visualize how good something of merit will be when it is deeply out of favor. We also think we have the ability to avoid excessive optimism attached to extrapolation of the recent past. Elon Musk and SpaceX just shot a NASA rocket into outer space this weekend. Like popular expensive glamour stocks, everything comes down to earth eventually. […]

Great investment opportunities are lonely. History shows us the crowd behaviors to avoid and the investment market circumstances to capitalize on. We believe we are at one of the great junctures, where the crowd thinks they unequivocally know the future. Simultaneously, they have left the stocks related to the unknowns for dead. What does history tell us about situations like this? What stocks are mega-cheap based on the unknowns?

We are big fans of Buffett’s theories about businesses with low capital requirements and the ability to throw off cash to owners. Unfortunately, he recently emphasized indexing and didn’t shy folks away from today’s glamour tech stocks which require more and more capital. In Berkshire’s 2007 Letter to Shareholders, Buffett outlined what “The Great, the Good and the Gruesome” businesses look like. He profiled “gruesome” business by using airlines as his poster child and described them in the opening quote of this letter. Buffett would have been well served by listening to his 13-year-younger self, and we think his description of gruesome stocks should serve us well in assessing today’s market.