Political Punching Bags
by William Smead, Smead Capital Management
The United States has one of the most successful biotech/pharmaceutical industries and arguably the premier banking institutions in the world. During the current presidential race, populist politicians on both sides of the aisle have gained a great deal of popularity by turning these two industries into political punching bags.
Consider the characteristics of a punching bag: its composition, strength and durability.
A punching bag is built with a cylindrical shape and has a very strong exterior cover. It is composed of materials which absorb the blows of a boxer or a martial arts specialist. The outer covering stretches while the interior materials give way to protect the puncher’s fists, arms, feet and legs. Despite the abuse a punching bag takes, it returns to its normal form after numerous daily assaults.
At Smead Capital Management, our eight criteria for stock selection look for a certain composition, strength and durability in a company. To qualify for our portfolio, a company must meet an economic need and have significant barriers to entry to ward off potential competitors. The company has to have a history of high profitability, consistent free cash flow generation and be available at a bargain price compared to the last five to ten years of trading. We also prefer companies to have a strong balance sheet, history demonstrated shareholder friendliness and have significant insider ownership, preferably with recent insider purchases.
These eight criteria allow the companies in our portfolio to take punches over the years from potential competitors and government regulators ― and take political kicks in the face from populist candidates. They are strong and durable just like a punching bag.