by William Smead, CIO, Smead Capital Management
Dear fellow investors,
Our long-time investors are probably wondering why we haven’t made any gains over the last 18 months. First, we have no ability to predict which already popular stocks will stay or get more popular. This includes tech stocks, AI stocks, wide-moat high-quality consistent growth stocks and up-and-coming future tech leaders. Momentum has been the single best of the factors in factor investing for 15 years! We are paid to be greedy when others are fearful and fearful when others are greedy. To say we’ve been fearful would be an understatement.
We get asked all the time when this trend will change. Thanks to writer Jack Reacher at The Wall Street Journal, we might have an answer. In a July 5th article titled “Meme Stocks and YOLO Bets Are Back,” Reacher does a great job of explaining where we are in the stock market cycle:
“Shares of unprofitable companies have outperformed since early April, and investors are now speculating like it is 2021.”
We have eight criteria for stock selection, and one is a long history of profitability. Reacher points out, “since April 8 [of this year]…through late June the 858 unprofitable companies in the Russell 3000 Index with no earnings have since posted average gains of 36%, outperforming their profitable peers.”
Therefore, the market has added another major category of things we don’t ever want to risk our capital on. What does this set up? Reacher is comparing this to the meme trades that turned into FOMO (fear of missing out) back in 2021. In a world of easy sports betting, crypto rat poison and stock speculation, the new acronym is YOLO (you only live once). Remember, there are 180 million Americans under 40 and more single working adults than ever with money to invest and nobody depending on them. We are all more aggressive with money when nobody else depends on us.
A reminder of what happened in 2022 after the nuttiest of the nutty stocks went wild in 2021:
- S&P 500 was down 18.12%
- Nasdaq QQQ was down 32.38%
- ARKK (ARK Innovation ETF) was down 66.97%
Ironically, there are many companies being neglected because of the interest in popular and/or speculative common stocks. Also, we believe inflation will be a persistent problem as the Federal Government wrestles with the $12 trillion monetized to fight COVID-19 from 2020 to 2023. Owning a home is being your own landlord (inflation defense) and the supply of homes needs to increase to bring selling prices down. The oil and gas industry looks like a once-in-a-20-year opportunity as compared to the S&P 500 Index!
In conclusion, we are in the late stages of a speculative episode that we believe is highly likely to end badly. We have almost no exposure to the sectors involved in the greed, and for that reason, we anticipate stacking up quite well when the markets return to their natural order.
Play The Long Game,
William Smead
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, Chairman & CIO, 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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