Dear fellow investors,
This is the story of man named Jed
Poor mountaineer barely kept his family fed
Einhorn’s FOF Re-positions Portfolio, Makes New Seed Investment In Year Marked By “Speculative Exuberance”
It has not just been rough year for David Einhorn's own fund. Einhorn's Greenlight Masters fund of hedge funds was down 3% net for the first half of 2020, matching the S&P 500's return for those six months. In his August letter to investors, which was reviewed by ValueWalk, the Greenlight Masters team noted that Read More
Then one day he was shooting at some food
And up through the ground came some bubbling crude
Oil that is, Black gold, Texas Tea
Our definition of value is to buy meritorious companies at a significant discount to intrinsic value with a high margin of safety. Since doing this is more art than science, the margin of safety is important. For the last ten years, we have “shot for food” in value stocks like American Express (AXP), Target (TGT) and Discovery (DISCA). We have “kept our family fed” in an extremely hostile environment for value investment shoppers with the help of a booming bull market in stocks. This boom is built on the back of low inflation and historically low interest rates. All past momentum has seemed to become more good momentum!
The first thing you know Old Jed’s a millionaire
Kinfolk said, Jed move away from here (Value)
California (Growth) is the place you ought to be
So he loaded up the truck
And he moved to Beverly,Hills that is, swimmin' pools and movie stars
“Then one day,” we came across massive insider buying in “bubbling crude” (Occidental Petroleum: OXY)! It came with a ringing endorsement from Warren Buffett and frustration from the very successful activist, Carl Icahn. He had been drilling for profit in OXY and got interrupted by their acquisition of Anadarko. Buying Anadarko came with a ringing endorsement from Chevron, who was willing to dilute their common shares outstanding by 10% to buy Anadarko.
“The first thing to know,” is you don’t get rich quickly in value investing (God willing, you get rich slowly). In fact, anyone watching the last five years in the U.S. stock market would say, “Move away from here.” FAANG (Facebook: FB, Amazon: AMZN, Apple: AAPL, Netflix: NFLX and Alphabet: GOOGL) growth “is the place you ought to be,” so we should “load up the truck and move” to Silicon Valley! In many ways, these super successful tech giants have been the only “place to be” for five years. This has caught the attention of Research Affiliates’ Rob Arnott and was shared by Jason Zweig in his Intelligent Investor column on January 10, 2020 in The Wall Street Journal.
Five tech companies are the largest market caps in the S&P 500 Index and the Fortune 500. The only time one sector has so dominated the top five list was in 1980-1981. The top five were oil stocks. In fact, 12 of the top 20 in the Fortune 500 were oil stocks. Near the end of the dot-com bubble, two non-tech companies were in the top five market cap stocks. Being in Silicon Valley has been "swimmin' pools and movie stars.” In fact, these tech behemoths are falling all over each other to throw money at movie stars in a streaming war which looks to us like a “battle royale”. We believe the major streaming companies could end up as frustrated as Mr. Drysdale. Here is how Zweig describes the current California-like circumstance:
Why have cheap stocks fallen so far behind? The short answer: Investors, already enthusiastic over high-priced growth shares, have turned euphoric, driving their prices even higher relative to value stocks.
What can we learn from “loading up the truck” at extremes of success and popularity for a specific market sector (internet-based commerce, media and advertising)? In oil’s case circa 1981, we learned that extrapolating current growth trends fails at extremes. Peak oil went down in defeat like it has every 15 years since I’ve been alive. Inflation drastically subsided from 1981 to today and prosperity in the U.S. was like Goldilocks most of the time, “not too hot and not too cold.” Oil didn’t get back into the limelight until China’s growth overwhelmed commodity prices between 2005 and 2014. This drove oil prices above $100 per barrel in two separate years.
If you watched “The Beverly Hillbillies” TV show, you’d recognize very quickly why it was bad advice for Jed and his family to, “move to California.” They were fish out of water. We would be in the same situation if we moved our portfolio into Silicon Valley — we wouldn’t have Mr. Drysdale and Jane there to help us survive! Take heart, value investing will come back into favor in the everlasting tug of war between growth and value. It just is going to an extreme this time which presses even the most optimistic person:
The study finds that value companies aren’t unusually inexpensive relative to their own earnings and assets—but they are nearly the cheapest they’ve ever been compared with growth companies.
We suggest not holding your breath waiting for growth to lose its luster. We would suggest you join us shooting for food and look at oil (Occidental Petroleum: OXY), home building (Lennar: LEN), entertainment content (Discovery Communications: DISCA), e-commerce (eBay: EBAY), banking (Wells Fargo: WFC) and real estate (Macerich; MAC). With patience, they could turn into Black Gold and Texas Tea.
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, 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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