Bill Smead

When it comes to futuristic-oriented things, there's an early stage of excitement. People see all the money that's "supposedly" being made, but the accounting starts getting really rough.

What's going on now is that the big hyperscaler companies, who were massive free cashflow generators and never borrowed money, are now reversing and are negative FCF. Investors always loved that they had wide moats with high FCF. But now they're giving that up to secure their AI participation. Investors are ignoring that in hopes that there's a reward at the end of the rainbow.

Watch the way the hyperscalers are borrowing. The sketchiness of the whole thing is that they're not using A-rated, 20-year bonds to do this. They're doing it off-balance sheet or through circular financing.

In 1999 Lucent Technologies loaned $$ to their startup customers, and counted repayment as 45% of their revenue that year. And we know how that ended.

We're already in that phase.

WMT and COST are the dominant discount retailers in the US. They became priced for perfection, with multiples of 40-50x PE for a large, mature company. Might be a great company, but that multiple's for a younger company, growing at very high rates because it can get a lot bigger. Both are in the process of compressing to a 20x PE multiple.

Either earnings are better than expected, and stock trends sideways. Or earnings are worse, and multiple goes down. Either way, not much upside.

Doesn't do any short-term trading. Owns 27 stocks in his US fund, and 27 in the international one. There's a set of circumstances that his team looks for, if not a particular price.

If things are going really badly, and we're in a big recession, nobody wants to touch stocks, and investors are scared, that's when they apply their criteria for stock selection. It takes a terrible market to create bargains out of wonderful companies, you have to be patient.

As a firm, they're contrarians. People ask him when will interest rates stop going up? He has an odd answer:  Rates are going up because the most profitable, highest-FCF-generating companies in the US moved from being providers of credit (hyperscalers put all their extra cash into treasuries), to now borrowing money off balance sheets like drunken sailors on weed.

So you have the normal borrowers in society, plus former savers, now borrowing. This is a fever of people investing in AI. No wonder the price of $$ is going up, if you believe in the laws of supply/demand. If you assume that the fever will break at some point, now might be the time to start betting on bonds and dollar-cost-average your way in over the next year or so. 

Priced right now as though stocks will never turn sour and the AI bubble will never break.

His team sincerely believes that we're 6 years into 15-30 years of a relatively golden era where oil & gas companies outperform the rest of the stock market and the rest of the economy. By simply operating its business, just gushing cash. Buying back stock, being very responsible. 

Long-term hold for him. He's not buying at the moment, but you could start a position if you share his long-term outlook.

His team sincerely believes that we're 6 years into 15-30 years of a relatively golden era where oil & gas companies outperform the rest of the stock market and the rest of the economy. On May 1, 2020 (when the Saudis took the price of  oil to zero), that was like the bottom of the Great Depression or the Financial Crisis. Now we're reverting to the mean. 

From 2017 to 2021, political/religious movement related to fossil fuels. People were shamed from investing in fossil fuels. During that time, no one poked any holes in the ground or put capital to work. The antithesis of "drill, baby, drill". 

Likes the sector. For example, he owns ULTA and CROX. 

Some difficulties, perhaps mismanagement. Likes to buy great companies that are deeply out of favour, but not because there are problems that need to be fixed.

Likes the sector. For example, he owns ULTA and CROX. Likes good retail. Addicted customers are always a wonderful thing. 

He no longer owns SBUX, but it was one of his firm's first big wins. The US was in a deep recession for a long time after 2008, and everyone told him, "Bill, no one's going to buy a $4 cup of coffee." But it was the only luxury people kept. They weren't taking vacations or doing anything fun, but that little luxury kept people going.

His relatives are all over this store like a blanket. He completely missed it. It's so good, it never goes on sale (by his metrics, not just "down from where it was"). A lot of things are overpriced, and then they go down quite a bit, but they're still overpriced. Wonderful company, great fan club. He'd consider it if it met his criteria.

"On sale" in his books means according to his metrics, not just "down from where it was". A lot of things are overpriced, and then they go down quite a bit, but they're still overpriced. Just because something's pulled back, doesn't necessarily mean it's a good idea to buy it.

The Mother Teresa of common stocks in the US. Problem is, it got to 50x PE. How can one of the largest retailers grow enough to justify that multiple? It could happen, but not a high probability. Probably a wonderful purchase at 20x, but we're a long way from there. Either earnings have to grow a lot, or the stock has to come way down.

His team believes that a lot of $$ is going to be made over the next 10 years building house in the US. The level of building right now, for the population, is not keeping up. The situation won't be cured until the AI mania breaks; that demand for credit is creating upward pressure on mortgage rates. 

The next bear market in the S&P 500 is probably going to be a doozy, and more than a year (like 1973-74 or 2007-2009). When that happens, the primary investors (50- to 80-year-olds) will flee to safety, and they'll flee to interest-bearing instruments. They'll take the bird in the hand and give up the two in the bush. (Right now, it's the 8 in the bush :) The bird in the hand doesn't have anything.)

We're not going back to 1-2%, that was just a bit of Covid-induced despair. But rates will, eventually, be lower.

Sentiment among the homebuilders is at very low levels.

His team has 8 criteria to select stocks.

A bargain to its intrinsic value. For different industries (whether growth or traditional value), that "bargain" will look different. Wide moat. Long history of success. High and consistent free cashflow. Strong insider ownership with recent purchases. Strong balance sheet (though he'd give up some of that temporarily, while strong FCF repairs the balance sheet).

It's tough to meet all those requirements. They find about 3 good ideas each year. You can look at his website.

They're constantly looking for companies that meet their criteria, then patiently wait for them to get thrown in the dumpster (many times by circumstances that don't have anything to do with them). One example is UNH.

They tend to leg in to positions. A full position is, typically, 3%.

Out of 2008-2009, his team came out with "broken growth stocks" -- DIS, SBUX, AMGN. Growth stocks that were formerly highly thought of, but trading at low double-digit PE multiples.

Problem is that people are waiting long to get married, buy homes, have children, and be big Disney customers with kids. Over 10 years, what could really change the dynamic is the birth rate going up a lot. Parks are the marquee part of the business, not streaming. (He has 15 grandkids, so he has a really good lab on what's hot and what's not.)

He bought in 2009, made a lot of money, and traded out.