28 BARRON’S November 22, 2021
FUND PROFILE
Talking WithBillandColeSmead
Co-Managers, Smead Value
Photograph byCASSIDY ARAIZA
StocksThat
MakeYou
‘Queasy’
M
illennials are buying homes and having
children later, demonstrating far different
priorities and challenges than the baby
boomers who raised them. But Smead
Capital believes that members of this gener-
ation have more in common with their par-
ents than they care to admit.
“We have a vision of what the next five to 10 years is
going to look like, and the dominant factor is what hap-
pens as millennials continue to get married, have families,
and buy houses,” says Bill Smead, 63, the firm’s founder.
The father of five has watched this pattern with his
own adult children and their friends, but for a direct line
into how this thesis is playing out, Smead can ask his
second-oldest, Cole, who sits directly to his left. In 2007,
Cole helped his dad launch their value-focused fund
shop, and in 2014 he joined his father and co-manager
Tony Scherrer in running the firm’s flagship $3.1 billion
Smead Valuefund (ticker: SMVLX).
The Smeads have their differences when it comes to
vacation ideas (Bill thinks Cole’s trips are too exotic) and
the greatest baseball player of all time (Bill says Willie
Mays, and Cole says Ken Griffey Jr.). But when it comes
to investing, the younger Smead is all in on his father’s
strategy of buying companies that customers can’t live
without—when investors want nothing to do with them.
If the idea of buying a stock makes you queasy, “you
probably should be buying,” says Cole, 37.
The fund—which typically owns 25 to 30 U.S. stocks—
tends to see more than its share of volatility. For investors
who have held on for the ride, however, the reward has
been 17% average annual returns over the past decade,
better than 99% of the fund’s large value peers, even after
accounting for a high, 1.26% expense ratio.
To remove the emotion around investment decisions,
the Smead team uses eight criteria, starting with five that
By SARAH MAX
Cole Smead, left, and
his father, Bill SmeadNovember 22, 2021 BARRON’S 29
aren’t negotiable: Companies need to meet
an economic need, have a distinct competi-
tive advantage and track record of profit-
ability, generate free cash, and trade at a
significant discount to their intrinsic value.
The team also considers the health of a
company’s balance sheet, its history of
shareholder-friendly decisions, and strong
insider ownership.
Home builders have been a staple of the
fund since late 2013, when it became clear
that demand for housing from millennials
would dramatically outpace supply. “The
number of homes built in 2011 on an abso-
lute basis was 40% lower than the worst
single calendar year in the prior 60 years,”
says Bill Smead. He bought shares inNVR
(NVR), the parent company of Ryan Homes,
for $940 that year; the stock recently traded
around $5,200. The fund addedLennar
(LEN), recently priced near $108, for $47 in
- In late February 2020, as the Covid-19
pandemic was prompting the early stages of
a broad market selloff, the Smead team
scooped upD.R. Horton(DHI) around $57
a share. It recently traded for about $93.
In addition to demand outweighing sup-
ply, says Bill Smead, large home builders
have the advantage of scale—especially in
the face of supply-chain issues—in what is
otherwise a highly fragmented industry.
“D.R. Horton says it will build 10% of all
houses in the U.S. this year,” says the older
Smead, who believes that the industry is
poised for consolidation, which will pave the
way for higher profits and stock multiples.
With a surge in home buying comes in-
creased foot traffic in lifestyle centers featur-
ing restaurants, entertainment, and retail.
“I feel bad for hedge funds that pay mil-
lions of dollars in research to run helicopters
over shopping mall parking lots, when I just
go home and talk to my wife,” says Bill
Smead, who describes her as a prolific
shopper and trend spotter.
Millennials may be more inclined to point
and click for basic necessities, but investors
have been too quick to write the obituary
on shopping malls, he says. That thesis
prompted the fund to buyMacerich(MAC),
which is considered one of the best shop-
ping-center operators in the business, in July
2019 at about $33 a share. When the pan-
demic sentSimon Property Groupshares
(SPG) tumbling in March 2020, the Smead
team took note that CEO David Simon and
other insiders were buying, and the fund
snapped up stock in the largest retail real
estate investment trust at $57 a share.
As demographics drive demand for hous-
ing and commercial real estate, rising infla-
tion makes land—and particularly land rich
in natural resources—all the more valuable.
That’s just one reason that the Smeads like
energy stocks, which represented 20% of
fund assets at the end of September.
After taking an extended hiatus from
energy stocks—the fund last owned the sec-
tor in 2010—the managers boughtOcciden-
tal Petroleum(OXY) in 2019 but sold it at
a loss in 2020 as concerns over its debt-
funded acquisition of Anadarko and plung-
ing oil prices sent its shares into the teens.
The fund used tax-loss harvesting to replace
that position withChevron(CVX) at $109
a share, and then addedContinental Re-
sources(CLR) in August 2020 at less than
$19ashare,followedbyConocoPhillips
(COP) in October 2020 at about $33. All
three stocks have gained since.
As the Smeads’ conviction about oil in-
creased, they invoked Warren Buffett’s twist
on a Mae West quotation—“Too much of a
good thing can be wonderful”—and bought
Occidental again in July this year, in the
mid-$20s. Buying it back at a higher price
was “one of the hardest things I’ve ever
done,” says Bill Smead. Yet the very thing
that worked against Occidental in 2020—its
debt—could work in investors’ favor. “In a
couple of years, they could be in a position
to buy back their bonds at a lower price, and
on stronger oil prices,” says Cole Smead.
The Smeads, of course, are aware of the
growing pressure to replace fossil fuels with
clean energy. Cole Smead posits that energy
companies could eventually be leaders in
carbon sequestration, but they say the en-
ergy transition will take far longer than cur-
rent multiples suggest. “I was 10 years old
when the U.S. government banned tobacco
ads on television,” says Bill Smead. “Guess
what was the best-performing stock on the
New York Stock Exchange over the next 40
years?Philip Morris.”B
Smead Value
Total Return1-Yr 5-Yr 10-YrSMVLX 55.9% 17.8% 17.2%Russell 1000 Value Index 31.0 11.7 13.0Top 10 Holdings
Company / Ticker % AssetsContinental Resources / CLR 8.5%American Express / AXP 6.0Target / TGT 5.8Lennar / LEN 5.2NVR / NVR 4.9Simon Property Group / SPG 4.7Macerich / MAC 4.7ConocoPhillips / COP 4.6eBay / EBAY 4.6JPMorgan Chase / JPM 4.5Total 53.5%Note: Holdings as of Sept. 30. Returns through Nov. 15;
five- and 10-year returns are annualized.
Sources: Smead Capital Management; MorningstarScoreboard: SouthernExposure
(U.S.stocksrallied,withtheS&P500up1.19%,whiletacticalallocatorQuantifiedSTFsurged5.72%.
InflationfearsandastrongdollarsankLatinAmericacurrencies,withstocksdown6.11%.
OneWeek Year-to-Date
U.S.STOCKFUNDS 0.02% 23.66%
TOPSECTOR/LatinAmericanFunds – 6.11 – 15.65
BOTTOMSECTOR/QuantifiedSTF;Inv/QSTFX 5.72 31.24
S&P500 1.19 25.25
U.S.BONDFUNDS – 0.15 0.91
BloombergBarclaysAGGBond 2.02 24.69THEWEEK'STOP25Fund InvestmentObjective OneWeek Year-to-Date
FidelitySelRetailing/FSRPX ConsumerServices 4.91% 26.6%
FidelitySelCnst&Hous/FSHOX ConsumerGoods 4.20 51.1
FederatedHrmsMDTMNIS/QQMNX AltLong/ShortEq 4.14 21.1
MorgStanIAdvtgI/MPAIX Large-CapGrowth 4.09 13.5
TransamCapGrowthI/TFOIX Multi-CapGrowth 3.99 22.1
WirelessFund/WIREX Telecommunication 3.96 21.8
MorgStanIGrowthI/MSEQX Multi-CapGrowth 3.84 23.3
FidelitySelSemicnd/FSELX Science&Tech 3.56 56.6
FidelityAdvSemicndA/FELAX Science&Tech 3.52 54.9
CounterpointTactEqI/CPIEX AltLong/ShortEq 3.50 35.0
FidelityAdvCnsDisA/FCNAX ConsumerServices 3.42 24.4
FidelitySelCnsmrDsc/FSCPX ConsumerServices 3.40 24.8
GAMCOGlGlGrowthAAA/GICPX GlobalLarge-CapGrowth 3.26 25.9
HCMTacticalGrowthA/HCMGX Multi-CapGrowth 3.17 41.4
JHancockIIIUSGroA/JSGAX Large-CapGrowth 3.15 24.3
BNYMTechnologyGrowthA/DTGRX Science&Tech 3.12 22.5
PGIMJennGrowthZ/PJFZX Large-CapGrowth 3.10 24.5
AmanaGrowthInv/AMAGX Large-CapGrowth 3.09 30.1
PGIMJennFocusedGrZ/SPFZX Large-CapGrowth 3.07 18.0
JHancockIICapApNAV/JHCPX Large-CapGrowth 3.05 24.5
HarborCapApprecInst/HACAX Large-CapGrowth 3.04 24.1
TransamLargeGroI3/TGWTX Multi-CapGrowth 3.03 22.9
MatthewsAsiaTotRIns/MINCX EmgMktsHCDebt 3.01 – 2.9
VATechnologyInst/DRGTX Science&Tech 2.95 22.4
ProFundsBtcnStrPFInv/BTCFX AltCurrencyStrat – 10.82 NATHEWEEK'SBOTTOM10Fund InvestmentObjective OneWeek Year-to-Date
CBOEVBitcoinSMVY/BTCYX FlexiblePortfolio – 7.51% NA
BlackRockLatinAmerA/MDLTX LatinAmerican – 7.33 – 18.4
TRowePriceIntLtAm/PRLAX LatinAmerican – 6.24 – 13.1
RydexEnergySvcsInv/RYVIX NaturalResources – 6.20 25.4
DWSLatinAmEqS/SLAFX LatinAmerican – 6.16 – 11.6
JacobInternetFundInv/JAMFX Science&Tech – 6.03 27.8
JacobSmallCapGroInst/JSIGX Small-CapGrowth – 5.96 13.1
FidelityLatinAmerica/FLATX LatinAmerican – 5.53 – 18.8
PerkinsDiscovery/PDFDX Small-CapCore – 5.09 16.8THELARGEST25
Assets 3-Year* 1-Week YTD
Fund (billions) InvestmentObjective Return Return ReturnFidelityContrafund/FCNTX $129.5 Large-CapGrowth 26.9% 2.20% 27.3%
VanguardWellingtonAdm/VWENX 109.4 MixTgtAllGro 15.1 0.56 17.2
AmericanFundsBalA/ABALX 102.8 MixTgtAllGro 13.4 0.44 14.5
Dodge&CoxStock/DODGX 95.8 Multi-CapValue 16.4 – 1.07 30.9
AmericanFundsEuPcR6/RERGX 91.0 IntlLarge-CapGrowth 17.3 – 0.16 6.4
AmericanFundsIncA/AMECX 83.3 MixTgtAllMod 11.0 – 0.30 14.2
PIMCOIncomeInst/PIMIX 82.2 Multi-SectorInc 5.6 – 0.26 2.3
AmericanFundsICAA/AIVSX 80.1 Large-CapCore 18.0 0.92 23.6
AmericanFundsWashA/AWSHX 76.4 Large-CapValue 16.4 0.28 24.6
Dodge&CoxIncome/DODIX 72.3 CoreBond 6.3 – 0.07 – 1.0
VanguardPRIMECAPAdm/VPMAX 71.8 Large-CapCore 19.0 – 0.32 22.5
BlackRockCashInstSLA/ 71.8 InstlMoneyMkt NA NA NA
FidelitySAUSTotStk/FCTDX 70.2 Multi-CapCore 22.3 0.57 25.8
AmericanFundsFInvA/ANCFX 69.8 Large-CapCore 18.6 0.62 21.7
AmericanFundsNPerA/ANWPX 69.1 GlobalLarge-CapGrowth 25.4 1.30 20.0
AmericanFundsCIBA/CAIBX 67.6 GlobalEquityIncome 9.7 – 0.37 11.9
FidelityStrAdvLgCp/FALCX 63.4 Large-CapCore 0 0.95 27.6
AmericanFundsCWGIA/CWGIX 62.5 GlobalLarge-CapCore 16.3 0.43 14.5
TRowePriceBCGro/TRBCX 61.6 Large-CapGrowth 26.3 2.17 23.1
VanguardIntlGroAdm/VWILX 61.4 IntlLarge-CapGrowth 27.5 0.22 5.2
VanguardITR2030Inst/VTTWX 59.9 Mix-AsstTarg2030 14.0 0.29 11.8
PIMCOTotRtnInst/PTTRX 57.2 CorePlusBond 5.7 – 0.05 – 1.1
VanguardSh-TmInvAdm/VFSUX 55.8 ShortInvGrade 3.8 0.03 – 0.3
VanguardITR2025Inst/VRIVX 55.5 Mixed-AssetTarget2025 13.0 0.27 10.2*Annualized10/18/2018to10/21/2021.ThroughThursday. Source:Lipper