Category: Missives

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. […]

Entropy, which is a measure of disorder, is present in every aspect of our world. At a high level, it just means all things trend toward disorder.

Over the last twelve-plus years it’s been fascinating to watch the Federal Reserve struggle to defy the laws of nature through unconventional monetary policy and in the process, we believe, decrease the stability of the system. […]

We love the stock market, but there is one job in the industry we would never want to have. Most investment and mutual fund companies have a stock market strategist. This is the person who gathers statistics on the stock market, reviews the charts, tracks sentiment indicators, and attempts to guide investors on what might do well over the next six to twelve months. […]

[…] Mr. Market knows that low ROE produces low multiples and high ROE produces high multiples. He’s just very manic when he is jaded. We are seeking high-return businesses that are mispriced. By God’s grace, there are a lot of jaded investors and a lot of mispricing in this space. We’re sorry that Mr. Market is jaded. The right business managers can take us places. These companies are lonely now and (in comparison) we love it. We are sorry that investors are jaded.

[…] We at Smead Capital Management have our faults, but we never “choose to forget” what has happened in past stock market cycles. For this reason, we are very over-weighted in energy and very under-weighted in the glam tech sectors which have totally dominated the first half of 2023 and the last 12 years in the stock market. “Memories may be beautiful and yet” we believe that forgetting what has happened in analogous situations is a ticket to stock market failure!