This fund manager is excited by turmoil and is snapping up energy companies, shopping malls and home builders.
Critical information for the U.S. trading day
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The standard advice from Wall Street these days: stay defensive, be wary. And retail investors seem to be heeding that, rejecting stocks and bonds for money-market funds as a banking crisis also simmers.
But our call of the day is tearing a page out of Warren Buffett old playbook — being greedy when others are fearful. “You should be more excited than depressed, because if there’s tumult, there will be winners and losers out of this,” says Cole Smead, chief executive officer and portfolio manager at Smead Capital Management, in an interview with MarketWatch in Madrid.
Investors err in trying to gauge the future via the stock market, rather than view it as a vehicle to serve them, he says. “Because it’s often your opportunity cost that kills you — what you could have done with money otherwise.”
“What is being availed to investors right now is capital intensive businesses that have some form of cyclicality and because everyone’s been so afraid that the Fed would cripple the economy and cause big economic problems…you can buy well-priced business that aren’t the businesses that people liked in the last decade,” said Smead.
Energy is an example of this, and a sector Smead said the firm hated from 2011 until early 2019, until it realized energy supplies were just getting tighter. The sector has “killed it from a one and two-year perspective,” but still only comprises 4.5% of the S&P 500 (SPX), he notes.
“We would not be shocked if you could wake up in the teens looking over the next decade. Why? We’ll go back to the 1970s, when the inflation Zeitgeist became supreme in the minds of investors, places like energy did incredibly well, places like single-family housing made money in real terms,” he said.
What didn’t do well then, was bonds or the stock market in general — he thinks we’re halfway through a bear market. It’s a similar setup now, and investors would be taking advantage of a similar situation now if they realized inflation is sticky, he said.
“So the energy business looks incredible to us. I mean in our U.S. portfolio, we own 23% energy and we’re just playing a different game,” he said. Among the stocks the firm owns are Occidental Petroleum (OXY), ConocoPhillips (COP) and Chevron (CVX) in the Smead Value Fund (SVFAX). In its International Value Fund , it also holds Canadian companies MEG Energy (CA:MEG) and Cenovus Energy (CA:CVE).
Another area he likes — classic American shopping malls, which didn’t get killed off as expected by the pandemic, though new ones won’t likely be built soon as “that is still very psychologically damaging to investors.” And for companies with great mall space assets, that means no new competition for maybe five years, he says.
“Secondly, the labor that builds those kinds of buildings is getting more and more expensive. So let’s say you just have five years worth, it’s probably going to cost you 25% more in five years to build those same assets today, which means the cost of replacement is growing and growing and growing,” he said. To play this, the firm owns Simon Property (SPG) and Macerich (MAC) in its Smead Value Fund (SVFAX).
He also likes home builders, which were weighed by fears of a hard hit by Fed tightening, something that hasn’t happened, because housing supply is “way too tight.” A couple of stocks owned in this space are NVR (NVR), a home builder that doesn’t own any land, and D.R. Horton (DHI), which only owns 25% of its land.
“So we’re moving away from the idea that home builders have to be land developers, which means think of the pullback in housing. Well, does it affect the balance sheet of the business? No, because they don’t own the land,” he said. “They’re just putting the houses there, they’re just building the house, which means the return on equity through the cycle is higher there. They’re not taking the balance sheet risks through the cycle, which means people should be paying higher multiples.”
Read: 11 stocks in the S&P 500 expected to form an exclusive growth club for investors
The markets
Stock futures (ES00) (YM00) (NQ00) are slightly lower, bond yields (TY00) (BX:TMUBMUSD02Y) are a bit higher and the dollar (DXY)is weaker as well. Oil prices (CL.1) are up some.
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The buzz
Alibaba shares (BABA) are climbing on a report the Chinese internet giant will restructure into six independently run entities.
The value of secondhand Tesla (TSLA) cars has collapsed since Elon Musk’s electric-car maker started dropping prices over the last few months.
Federal Reserve Vice Chairman for Supervision Michael Barr said the central bank raised concerns over SVB as far back as 2011. He’ll appear alongside FDIC Chairman Martin Gruenberg and Treasury Undersecretary Nellie Liang on Capitol Hill to face further questions over the recent banking crisis at 10 a.m..
Advance trade in goods, retail inventories and wholesale inventories are due at 8:30 a.m., followed by the S&P Case-Shiller and Federal Housing Finance Agency house price indexes at 9 a.m., then consumer confidence at 10 a.m.
Commercial real estate, which some expect will be the next shoe to drop, may not turn into a financial disaster, says economist.
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The chart
The S&P 500 is stuck between a “support sandwich,” according to Topdown Charts’ Callum Thomas, who provides this chart:
“As a status check, the S&P500 closed up on the week — above its 200-day moving average, above 3900, and above that fabled downtrend line. But it also closed below its 50-day moving average, below 4000, and below it’s apparent short-term uptrend line. So it’s a case of being sandwiched between various support and resistance heuristics as the range-trade stalemate continues…” he says.
The tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
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