Third, do what the Mafia does when it makes an investment. The Mob demands very attractive terms, because nobody else wants to invest in the project (usually because it is an illegal activity). The wise long-duration investor looks to buy into sectors, industries and companies that most investors are afraid to buy. Investors are afraid to provide capital to companies that compete with the “zero cost of capital” companies.
In today’s market this means buying into retailers when commentators on CNBC call them “un-investable.” We like Target (TGT) and Nordstrom (JWN), which sell at attractive P/E multiples, gush free cash flow and pay over 3 percent in dividends. It means buying Walgreens (WBA) at 10.5 P/E, while staples are getting slugged by the tech mania. Lastly, nothing seems more hated than the television and cable industries. The cost of capital for Discovery Communications (DISCA) is 10 percent at a 10 P/E and we believe the company’s earnings and free cash flow should grow immensely in a world of “zero cost of capital” companies.
In conclusion, strange things do happen in the stock market and occasional “zero cost of capital” manias seem to rhyme. We like to say that the stock market will do whatever it needs to do to frustrate the most people. We believe many unsuspecting common stock investors are caught in this mania via passive indexes and sector exchange-traded funds. Caveat emptor (buyer beware)!
William Smead is CIO and CEO of Smead Capital Management.