Salient to Investors:
Contrarian fund manager Bill Smead is:
- Bullish on the U.S. but bearish on companies exposed to China. Looks for strong balance sheets, industries with high barriers to entry, long histories of profits and dividends, p/e ratios below their 10-year average, strong insider ownership, and shareholder friendliness with regard to allocating capital.
- Likes U.S. companies with addicted customer bases – they benefit most from an improving economy. The U.S. began fixing its credit problems over four years ago, Europe’s 1½ years ago, China’s is just starting.
- Along with Warren Buffett, likes newspaper stocks which are so lowly valued that they only need to survive five years to payoff.
- Dislikes capital-intensive sectors that require lots of debt and equity to grow, like utilities, telephones, industrials, basic materials and energy, which do well when interest rates are low and borrowing is cheap but do badly as rates rise and borrowing becomes expensive. As rates rise over the next 20 years, capital-intensive businesses will be valued dramatically lower, including energy, basic materials and heavy industrials which will also be damaged by a hard landing in China.
- China is like the U.S. was in the 19th century – the U.S. grew 9 percent compounded from 1800 to 1900 but endured 18 recessions, three depressions and three all-out panics, and a Civil War. China is comparable to the biggest of those four-year depressions. The bust comes when lenders don’t get paid back.
- Likes financials because they are cheap and because the big banks own a lot of housing so will benefit when the 85 million baby boomer kids get married and buy houses.