Dear Fellow Investors:
At heart, Smead Capital Management is a stock picking organization. On top of our bottoms-up stock picking discipline, we are driven by our belief and respect for the laws of economics. One example of this is the subject of demographics. As long-duration investors, we want to understand where the aging process is taking demand in major product categories and how it will shape spending and production in the US. In other words, what economic needs will grow at the margin and who out there among companies that fit our other seven criteria can meet that marginal demand.
There are two huge population groups in the US. One group is made up of folks like my children—echo-boomers ranging in age from 18-37, with a mean age of 28 and are 86 million strong. The second group is my own and consists of baby boomers between 48 and 67 years old. We average out at around 58-59 years old and are around 83 million people strong. These two population bases make up about 50% of the US population. We believe these people are headed to a stage of life which is important to stock picking success, because the first of our criteria for stock selection is meeting an economic need.
Tollymore Investment Partners 2Q20 Letter: ESG ≠ sustainable investing
Tollymore Investment Partners letter to investors for the second quarter ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more Dear partners, Tollymore generated returns of +19% in the first six months of 2020, net of all fees and expenses. Investment results since inception are shown below: Tollymore's Raison Detre Tollymore is a Read More
To illustrate the intersection of demographics and economic needs, we’d like draw your attention to the chart below:
As the chart shows, there is a big ramp-up in spending in every category from the middle of the 25-34 age bracket to the middle of the 35-44 age bracket. This gets us very excited about the prospects for the US economy, for specific sectors of the S&P 500 index and for specific companies in our portfolio. It seems to us that the largest population group in the US is about to go through that path and it certainly puts the long-term vision of the economy on a strong footing.
We believe the consumer discretionary and financial sectors of the S&P 500 provide the purest play on the looming consumption of our largest population group. We own banks like Wells Fargo (WFC), Bank of America (BAC) and JP Morgan (JPM) which will make home and auto loans to these people and will take in the deposits from there rising incomes. NVR Inc. (NVR), the fifth largest home builder in the US, will likely get their fair share of what we think could be as many as 2 million new homes built in a single year sometime this decade.
Berkshire Hathaway (BRK.B) is both a strong play on the banks and is a major player in residential real estate through owning the second largest residential real estate brokerage, manufactured-home builder maker Clayton Homes, a carpet company and a paint company. We think increased economic activity would be a blessing for Berkshire’s Burlington Northern/Santa Fe Railroad. Gannett (GCI) provides the advertising outlets for residential real estate, auto sales and retail stores via 40 network-affiliated TV stations and 84 daily newspapers. Nordstrom (JWN), through their Nordstrom Rack stores/online shopping, and Ebay (EBAY) will provide many products we think these rising income adults need.
Notice how one main spending category expands for the aging baby boomers by looking again at the chart. There is a big increase in health and personal care. We like Merck (MRK), Pfizer (PFE), Amgen (AMGN) and Medtronic (MDT) for their ability to provide cost-effective medicines, treatments and devices to my age group. Also, folks over 60 have accumulated the lion’s share of the investable assets in the US. We like those same banks we mentioned above for their wealth management arms. We also like Franklin Resources (BEN) as a provider of mutual funds to the baby boomers, who are not only the largest group to ever hit their 60’s, but also are likely to be the longest living group to date.
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. 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.
This Missive and others are available at smeadcap.com