Millennials are perceived as the «lost generation». Born in 1981 to 1996, they have been rattled by the financial crisis and are drowning in debt, or so goes the common narrative. What’s more, their unconventional spending patterns are held responsible for the anemic growth perspectives of the US economy.
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Bill Smead thinks that’s utter nonsense. The highly regarded founder of the Seattle based investment firm Smead Capital Management is convinced that millennials won’t do things differently than their parents and grandparents. In his view, the only real difference to previous generations is that today, more people graduate from college and therefore wait longer to start a family.
According to the experienced value investor this means that in the coming years the focus of investors «will turn from technology-oriented companies which can do exciting things in an anemic environment to main street, on the ground, real life economic activity which is driven by household formation.»
Against this backdrop, he bets on homebuilder stocks like NVR and Lennar as well as on blue chip names like Home Depot, Disney and American Express. In this extended interview with the Market, he also explains why he has trimmed down his stake in Berkshire Hathaway.
Mr. Smead, after last week’s turmoil stocks are on the rise again. What’s your take on the financial markets?
We’re in the crazy stage and if you are flirting with things which are benefiting from the crazy stage you are playing with fire. Maybe valuations are not quite as completely stupid as they were in early 2000. But that’s like saying “Bill Smead is handsome” because I’m comparing him to an Ogre. I’m not handsome, but compared to an Ogre I am.
What does this mean for the outlook at the stock market?
You have to understand that value is record cheap versus the market. I started in the investment business in 1980 and today, value is the cheapest to the S&P 500 in my entire forty years in the business; even cheaper than 1999/2000. There is complacency everywhere but value. That’s because cheap stocks have become volatile and no one wants to own volatile. No one wants to own cheap. That’s also why there is a huge premium on defensive stocks versus cyclicals.
How does an experienced value investor like you navigate this kind of environment?
Like any good business person, you need to have a vision of what you think the next five to ten years are going to look like. That’s because that vision is an important factor in your ability to produce returns above and beyond what the index is going to provide. The first way to understand what’s going to happen in the next five to ten years is to understand what is extremely popular now and why it’s extremely popular
So what is your conclusion?
What has been extremely popular in the United States is enjoying our economy relative to other economies in the world, even though the US economy was underperforming relative to the growth in past areas. In other words: accepting this more muted, less dynamic economic growth pattern and then investing accordingly. This meant looking for businesses which can do extremely well despite the anemic growth pattern. This mindset has dictated what the stock market has done pretty much for the last ten years: The price being paid for growth has risen and risen, and simultaneously interest rates have moved lower and lower justifying these high prices.
And what’s going to happen next?
Technology stocks did well in an environment dominated by 80+ millennials who were single and whose spending was dictated by choice rather than necessity. But the group of people who are currently 21 to 38 years old is 40% larger than the generation they are replacing in that age cohort. So when 40% more people get crammed into the 30 to 45 age group, a lot of economic activity on the main street level happens which wasn’t happening in the prior decade. This means that the focus of investment success could turn from technology-oriented companies which can do exciting things in an anemic environment to main street, on the ground, real life economic activity which is driven by household formation and soccer moms.
Why do you think soccer moms will have such an important role in the US economy?
The soccer moms of the baby boomer generation re-elected President Bill Clinton in 1996. 23 years later, it’s the children of these soccer moms who will drive the US economy. This new millennial generation of soccer moms will be driving multi passenger vehicles that handle car seats and a lot of junk. They will want to buy a house and get out of their apartment crammed in next to everybody else in the inner city. This means we have a lot of homes to build in the US, we will have a lot of kids apparel and shoes to buy and we have a lot of expenses based on necessity rather than on choice. That’s the vision that goes across the top of our portfolio.
Then again, in the US and around the world, the economy is weakening and may even go into recession.
Whatever economic slowdown we have in the United States is likely to be mild in nature because the force of the millennials is already hitting. For example, there is a noticeable and meaningful pick-up in home building in what we call the exurbs: the highly populated coastal areas an hour and a half away from the cities. What’s more, the cities that are not on the coasts which have affordable housing like Kansas City, Des Moines, Iowa, St. Louis or Albuquerque are all seeing a very high activity in home buying and building. Never forget: money always goes where it gets treated the best.
Read the full article here by Christoph Gisiger, The Market NZZ
