We at Smead Capital are doubling down on the idea that the interest rates, which determine the discount rate for long-duration assets, are going to rise. What could possibly “satisfy you” if that happens? First, we think it takes much better economic growth and higher loan demand to get there. We like banks and insurance companies which reside in the 100 cheapest stocks and will be positively affected by an increase in the velocity of money and the spread between short-term and long-term interest rates. We believe JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), American Express (AXP) and Aflac (AXP) stand to benefit from this era and fall in the cheapest quintile.
Second, we seem “crazy” as we anticipate the positive effects that a baby boom among women from 30-40 years of age could have on the U.S. economy. We like Disney (DIS) and Comcast (CMCSA) for entertaining kids and high speed access to the home. We think a large number of those homes will be built by NVR (NVR), the maker of Ryan Homes in 15 states.
Lastly, we believe the long-duration agony for those who have stretched on PE ratios and technology dominance will do the opposite of “satisfy you.” We think you’ll get the same comeuppance that these prior over-pricing episodes produced. Fortunately, it will re-explain and solidify that the academic studies show expensive common stocks as a group under-perform on a long-duration basis, like they have in every historical and worthy academic study we’ve seen. The buyer of expensive common stocks should beware. When it comes to extremes like this, investors should find “the lunatic you’re looking for.”
William Smead is CEO and chief investment officer at Smead Capital Management.