Pushback: The Gift That Keeps on GivingLearn more about this firm
Dear Fellow Investors,
We have been out on the road telling the story of Smead Capital Management and explaining our portfolio of common stocks. One of the many benefits of these meetings is the feedback we get from existing investors, potential investors, the financial media and other interested parties. In our past and on a consistent basis, the most contentious stocks we own have been among our best performers over the following three years since we developed our eight proprietary criteria for common stock selection in the early 1990s. In other words, some of our vision of the future and our ownership of individual companies cause a great deal of pushback in conversation.
A few historical examples might be useful. In the aftermath of the documentary, "Supersize Me" (2004), McDonald's looked like a has-been for investors. Mickey D's stock price dropped to $25 because all we heard from investors and experts was that, "everyone would eat healthy in the future." The shares are around $96 eleven years later. In the pit of the 2007-09 recession and financial meltdown, all we heard was, "Nobody is going to want a $4 cup of coffee." Starbuck's shares traded in the teens back then and closed on December 8th, 2014 near $83. Lastly, the government intrusion into healthcare in 2010 appeared to be the death knell of medicine makers like Amgen (AMGN), Merck (MRK) and Pfizer (PFE). All we heard from folks we spoke to was about the loss of patents, empty drug pipelines and legal nightmares. Amgen has tripled in price since the summer of 2011, while Merck and Pfizer have both doubled.
Where is the push back coming from today? Folks we've engaged in investment conversations are pushing back on some of our key premises in the marketplace as we end 2014. First pushback: "Millennials (Americans born 19-38 years ago) won't get married and have three kids like prior generations did." Also, "even if they do get married and have kids, they will forgo cars and houses to stay in urban living situations and use public transportation." This contentiousness makes NVR (NVR), the fifth largest home builder look very attractive in our portfolio and TV entertainment companies like Gannett (GCI) and Comcast (CMCSK) look like a great bet. We believe that echo-boomers will be stranded at home on weeknights with two toddlers in their suburban home watching network-affiliated shows and local traffic reports.
Second big pushback: "Millennials are being suffocated by student loans and won't become a driving force in the economy for years." We have written extensively that the media has helped create an urban myth out of student loan statistics. Today's 28-year-old Americans have some student debt, but few have a mortgage.
Most of the high debt levels are attached to those who went to elite undergraduate colleges with fat tuitions/living expenses or graduate schools of the same ilk. Those higher debt levels are closely associated with the best paying jobs resulting from the required higher level of academic education.
Prior generations married younger, typically had only one main income provider, and leveraged up to buy houses and cars. If the majority of echo-boomers who delayed major life events because of the recession suddenly get married and have children it will be a huge stimulus to economic growth.
The government has been handling the Federal Government guaranteed student loans like a drunken sailor on leave. Since Sallie Mae (SLM) was relieved of its duties as the facilitator of those government-guaranteed loans and the U.S. Government took over. Since then, default rates have sky-rocketed. What could be more contentious than buying Navient (NAVI), the largest servicer of student loans and SLM, the largest originator?
One more current example of pushback is associated with eBay. Everyone is convinced that Amazon will destroy eBay's Marketplace business and Apple will eat PayPal's market-dominating secure-payment lunch with Apple Pay. The Marketplace business is gushing free-cash-flow and growing 10% per year. It has immense brand awareness without advertising. Ask Google, who just shut down Google Wallet, how tough it is to compete with PayPal. They (PayPal) are growing 20% compounded in sales and earnings. As eBay prepares to split into two companies, we'd like to think the best is yet to come. EBay was a big pushback stock for us in 2010 at around $20 per share and it seems to be back into the pushback saddle at around $56.
There are no guarantees in the stock market, but when it comes to stocks which have met our eight criteria in the past, pushback and contentiousness are the gift which just keeps on giving.
The information contained in this missive represents SCM's opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Bill Smead, CIO and CEO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.