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The stock market is discounting an accelerating rate of technological change in our society. A mad dash by investors is anticipating a world organized like “The Jetsons” cartoon from my childhood. We thought it would be useful to look back at other points in time where great technological change was anticipated and see how that worked out for S&P 500 Index investors.
July 21, 1969
The United States put the first man on the moon. The speculation at that time was that there would be people living in space in the coming decades. Forty-eight years have passed and now the advances into space are led by private investor billionaires like Elon Musk and Jeff Bezos. To say that there has been very little headway in comparison to expectations would be an astronomical understatement. The S&P 500 Index was around 93 at that time. Ten years later, the index had risen to 109 — a meager gain of 16%.
April 22, 1971
The first Earth Day was my 13th birthday. My seventh-grade teacher, George Cass, was an excellent science teacher and brought in an internal combustion engine to the school yard. We dug a huge hole in the playground and buried the engine under the assumption that it was a relic whose use would be phased out in the coming decades. Forty-five years later in 2016, electric car sales amounted to about one percent of auto sales in the U.S. The S&P 500 Index traded at 103 on April 22, 1971 and was around 134 ten years later. This was a gain of 29.8%.
Near the height of the technology stock bubble, Webvan went public at $15 per share on a total offering of $375 million. The offering valued the whole company at $4.8 billion. They purchased rival HomeGrocer, a money-losing business, for $1.2 billion in stock. At its peak, Webvan brought in $178 million in sales and had $525 million in expenses. Most experts expected that grocery delivery would be common place in the coming decade. The S&P 500 traded at 1,469 on December 31, 1999 and closed ten years later at 1,126, a decline of 23% in ten years. Are you seeing a pattern here?
There are a series of exciting things going on in technology today which investors anticipate will have relatively short lead times before wide-spread adoption. Here is a short list of these changes:
Amazon (AMZN) is buying Whole Foods and is doubling down on grocery delivery. There is something very special about a business model which has failed miserably for twenty years. We are located 10 blocks south of Amazon’s headquarters and regularly run into employees involved in main company initiatives. It is our understanding that Amazon believes they must succeed in groceries or they won’t ever become a one-trillion-dollar market-cap company.
The stock market seems to assume that Netflix (NFLX) and YouTube are going to completely control entertainment distribution globally. Investors are also assuming this will move everything to the internet, eliminating the need for everything from cable TV programming, network TV prime-time and news programming, and local network-affiliated TV news. These assumptions seem to operate under five-to-ten year outlooks.
Tesla (TSLA) is ramping up electric car production and Volvo (VOLV-B, a second-tier auto maker), announced that it would go all-electric or hybrid in manufacturing by 2019. This has spooked media companies that currently receive advertising from auto manufacturers, auto-parts retailers and websites like Cars.com (CARS). To those excited about electric cars, it goes without saying that driverless cars are being viewed in a similar vein. Quick and widespread adoption would clobber the auto insurance business and displace millions of cab and Uber/Lyft drivers worldwide.
Artificial Intelligence (AI) has captured the imagination of investors and has them convinced that manual labor is in a heap of trouble. Ambient technology goes along with this and will help you know what you need even before you notice its absence. It seems every company (other than IBM) involved with AI trades at a big premium to other stocks under the assumption that its use will come to pass sooner rather than later.
What should a sensible stock picker do with these super-exciting technology trends? First, you must respect the fact that time is a cruel disciplinarian. Most everything takes way longer than optimists believe in the middle of maniacal excitement. Second, historical long-term statistics show that cheap stocks outperform average ones, and more expensive stocks underperform over long-term stretches. Whether it was Fama-French, Bauman-Conover-Miller or Francis Nicholson; all the academic studies show the same thing. Paying up can work in the short run, but time is the friend of value stock owners.
Third, growth investors riding the wave of excitement from all the new technologies have dominated value investors for nine years. If there are any mean reversion fans out there, this is your opportunity. However, if you stand against a mania while it continues, you can look very foolish temporarily. We prefer to buy meritorious companies which are viewed as damaged by the quick and successful adoption of all this massive technological change. We do this under the assumption that walking on the moon, delivering groceries, and burying internal combustion engines takes a great deal longer to happen than people think.
The information contained in this missive represents Smead Capital Management's opinions, and should not be construed as personalized or individualized investment advice and are subject to change. 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. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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