The top five sectors in this fund include: Consumer Cyclical (36.17% of assets); Financial Services (34.58%); Healthcare (18.92%); Communication Services (3.41%); and Technology (3.10%).
Smead Value Investor (SMVLX)
From The No-Load Fund Investor
Despite being just flat so far in 2016, Smead Value Investor (SMVLX) has a five-year annualized gain through Aug. 31, 2016, of 17.0%, vs. 14.7% for the S&P 500.
Smead is a contrarian growth investor who told me in mid-August that the increasingly wide spread of P/Es in the market had him the most excited in years about potentially finding stocks he can hold for years (or even decades) in his fund. We agree that now would be a good time to consider his fund, as many of its holdings are cheaper than they’ve been in years.
He wants only those stocks with seemingly insurmountable competitive advantages and the profits and cash-generation that go with them, but his team will buy only when their valuations are low. This limits the portfolio to just more than two dozen stocks onto which they are willing to hold for the long haul. Portfolio turnover was recently 20% annually.
Smead and the fund’s two co-managers start with five mandatory characteristics in their search. First, the company must meet an economic need, as opposed to an intangible sort of concept that may evaporate as time goes by. Second, is a wide competitive moat, something about the company that renders it relatively immune to current competitors, or even to the infinite number of entrepreneurs who might come up with an idea that could drive the existing company into obsolescence.
Third, is high free-cash flow, the amount of cash the business generates in excess of its needs to fund current operations. Fourth is a long history of profitability, while fifth is an attractive valuation. The company must sell at a discount to where it has traded over the past five or 10 years on either a P/E or price/free-cash flow basis.
In addition to these five characteristics, Smead seeks companies with strong enough balance sheets to fund their growth internally, without accessing the capital markets. While expansion funded by debt may be relatively easy with interest rates currently so low, companies who need no debt will be at a much greater advantage if borrowing costs begin to rise.
One reason financial services stocks, including banks and insurance companies, account for nearly 30% of the assets of Smead Value is that the manager expects banks to profit immeasurably from increasing numbers of mortgage initiations as today’s 20- and 30-somethings buy homes over the next decade. Several of these stocks have P/Es in the low teens, as they’ve essentially been abandoned by most investors. He also likes Disney and other entertainment conglomerates, partially thanks to their positions as entertainment providers for children.
The fund also includes high-quality companies Smead considers inexpensive, regardless of industry. Examples include Amgen (biotechnology), American Express (consumer discretionary/finance) and eBay (consumer discretionary).
Mark Salzinger, The No-Load Fund Investor, 800-706- 6364, www.noloadfundinvestor.com, September 2016