Second, we must scrutinize our portfolio to lean on discounted securities which can be held a long time because of their quality. We must also lean the portfolio toward companies which would benefit from stronger economic activity driven by household formation and in turn home buying. We’ve watched companies which have been in an interest rate nightmare who will gain the benefit of a pickup in activity. They should enjoy an improvement on the spread between what they pay on deposits and what they take in on loans. The following are a few attractive ways which we believe we could make quite a bit of money from these circumstances:
Aflac (AFL)—sells supplemental health insurance which is needed by the parents of newly-minted families. Aflac had Yogi Berra make the case in a commercial by saying “If they get hurt and miss work, they won’t be hurt because they missed work.” They also run a huge bond portfolio which would benefit from higher interest rates.
Berkshire Hathaway (BRK.B)—The largest owner of Wells Fargo (WFC), American Express (AXP) and Bank of America (BAC): Berkshire Hathaway has loads of cash on its balance sheet and would like to see capital get more dear for reinvestment purposes. They are the second largest residential real estate agency, own Shaw Carpet, Benjamin Moore Paint, the Burlington Northern Railway(moving timber) and a slew of other housing-related businesses.
Wells Fargo (WFC)—We believe they are the best residential real estate bank and a key mortgage lender. The big banks will get more velocity from stronger GDP and millenial home buyers will demand mortgages and car loans.
All three of these are cheap on an absolute basis, extremely cheap relative to the broad index, and make us feel a little like Bobby Thomson in the batters box knowing what pitch is coming. If we trust the pitch coming and put a good swing on it, home sales in the U.S. may be another “shot heard around the world.”
Warm Regards,
William Smead
William Smead is CEO and chief investment officer at Smead Capital Management.