Category: Missives

[…] Even though we are eternal optimists by nature as long-only value managers, we relished Jim’s thoughts and studied his logic. He attempted to do on the short side what we try to do on the long side. He sold short popular and unmeritorious common stocks with confidence that economics would win out over time. He did this even though there has been a strong positive bias to the performance of the stock market. […]

[…] In The Godfather movie, peace didn’t last long. Michael Corleone took over from his father and proceeded to murder the leaders of the other mafia families in the New York area. The truce only provided temporary life support. AI looks like tech stock and S&P 500 Index life support to us. If they turn on each other, which their latest earnings reports show they are doing, won’t it get bloody? What happens if the seven stocks that have propped up the passive S&P 500 Index go through what every stock of popularity has done historically? This is just another reason to fear stock market failure!

[…] Let me also start this missive by saying that we at Smead Capital Management believe Jeremy Grantham is doing a great job of telling people how high the likelihood of stock market failure is. He’s trying to scare people and that is prudent advice. We tip our cap to him. We want to go into a second-level thinking discussion of how to take advantage of Mr. Market right now using Jeremy’s comments as a benchmark. […]

Close your eyes and imagine the elimination of gasoline-powered automobiles. Among people who believe in a quick transition away from gasoline to electric vehicles, they conveniently overlook the second-order effects, one of which is what might happen to the price of electricity with such an increase in demand. Is there a magician out there who can create the electricity needed to replace the gasoline we use today? Let’s sit in on a good first-year economics class to see how supply and demand are adding up. […]

When you are in a long-term bull market in growth stocks, you move from acorns growing into trees to asking trees to grow into a forest. We prefer to find meritorious acorns that could grow into trees, and this stock market is providing lots of opportunities in the smallest neglected large caps, and the largest neglected mid-cap stocks.

[…] We have taken the view that our eight criteria for stock selection will guide us to invest in great companies at very favorable valuations allowing us to be able to compound our returns over the long term. We don’t particularly care what the theme of the month or year is. This style of investing, while superior over the long run, takes a balanced blend of humility, conviction in the research process and a willingness to take risks through a contrarian asset allocation. It’s easy to say but very hard to do. It is our willingness to follow our process and invest regardless of the conventional market view that we believe sets us apart from our peers (particularly ETFs). This is not just something we say, a quick glance at our portfolio demonstrates it’s what we do as well. […]

[…] Fortunately for us, push eventually comes to shove. Since there is no end in sight in the demand for fossil fuels and there is only criticism for those who are poking holes in the ground to find oil and gas, something has to give. The something that has to give is either a massive increase in oil and gas drilling, or more likely, a consolidation of the industry by the very large-cap companies who were so scared to do this a few years ago at much lower prices. The proverbial “drilling for oil on the New York Stock Exchange (NYSE).” […]

[…] Investors should fear death like Barbie did. We call it stock market failure. These valuations won’t go up like a six-inch heel. Flats may be more fitting for thinking about stock returns going forward. The only way to fight this for stock investors is to be scrutinous about the businesses you own and what you are paying for those stocks. In the Barbie movie, Ken wandered the real world trying to make sense of things. He only came to bad conclusions and never ended up with Barbie. Stock investors could be no different in their own fantasy land.

[…] We especially like DR Horton (DHI), Simon Property Group (SPG) and Apache Petroleum (APA), as ways to get our share of the profits from a very overvalued stock market. It is a stock market that is priced under the assumption that inflation will abate. Unfortunately, the government is discouraging fossil fuel production, so get ready for high oil prices for a long time. Throw in labor demanding higher wages and you get both cost-push and demand-pull inflation like what we saw in the 1970s. As inflation becomes a decade-long problem, we believe you will see growth stock price-to-earnings multiples contract over time.

We love to be the optimist at the bottom in the stock market or in a major sector. When we started our strategy in 2007-2008, we were very lonely bulls. Even though the market bottomed in March of 2009, it took four or five years for investors to have any sustained confidence in stocks. By being optimistic we gained an edge over most stock-picking firms. […]