3. Expect a nasty bear market led by tech stock darlings sooner rather than later. The punishment for overpaying for bright futures of over-priced common stocks is well pointed out in Neff’s book. He reminded everyone that you had to be in the minority and on the outside looking in at tech/glam stocks at the beginning of 1966, in late 1972 and in 1999 when he wrote the book.
We are excited about our recent purchases of Walgreen’s (WBA), Amgen (AMGN) and Discovery Communications (DISCA). They trade at very low P/E ratios and gush free cash flow. Walgreen’s might acquire the rest of AmerisourceBergen that they don’t yet own, effectively thumbing their nose at Bezos and Amazon. The stock is at its lowest P/E ratio relative to the S&P 500 Index since it bottomed in 2012, when they temporarily lost one of their largest customers, Express Scripts.
Amgen is buying back 7.6 percent of their outstanding shares in a Dutch auction and is willing to pay as high as $200 per share. They have seen almost no insider selling in recent years even though their stock has risen 21.6 percent annualized since they started paying a dividend in 2011. We believe that their recently approved monoclonal antibody, Repatha, will be a huge success in lowering bad cholesterol. When President Trump finds out that they can take his bad cholesterol from the current 143 to 70, like most of the 27,564 people who participated in the FOURIER study, his tweets could be a lot sweeter for Amgen.
Discovery Communications is the premier creator of unscripted TV shows and is merging with Scripps Network (SNI), while the P/E multiples of these old media company’s shares are depressed by the glam tech platforms. They will own a major part of the most popular TV channels among women in the United States and have a great foothold in the development of pay TV in Europe.
Unscripted TV costs 10 percent of scripted TV shows to produce, so Netflix can have their victory lap with Ryan Murphy as he laughs all the way to the bank. In poker, they always say that if you don’t know who the sucker is at the table, you are the sucker. Hollywood producers and directors know who the suckers are at the table—it is the tech players with the least experience and Galbraith would say, the most intelligence ascribed over-confidence!
John Neff said in his book that what he did for a living was argue with the stock market. We are in the minority as non-owners of the most popular FAANG stocks, while the preponderance of the S&P 500 Index is tied up in expensive futuristic tech stocks. (FAANG stocks include Facebook [FB], Amazon [AMZN], Apple [AAPL], Netflix [NFLX] and Google parent Alphabet [GOOGL].) We believe we can understand where the next major crimes will be and where the most capital could be destroyed in the U.S. stock market. In a weird way, it is our “Minority Report.”
William Smead is CIO and CEO of Smead Capital Management.