Recovery Implies 1.5 Million Housing Starts per Year: an Interview with William Smead, Founder, Chief Executive Officer and Chief Investment Officer of Smead Capital Management

67 WALL STREET, New York - October 10, 2012 - The Wall Street Transcript has just published its Large-Cap Value Investing Report offering a timely review of the market to serious investors and money managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Large Cap Investing - Value Investing - Long-Term Investing

Companies include: Gannett Co., Inc. (GCI), Berkshire Hathaway Inc. (BRK-A), Media General, Inc. (MEG), Comcast Corporation (CMCSA), General Electric Co. (GE), The E. W. Scripps Company (SSP), The McGraw-Hill Companies, Inc (MHP), H&R Block, Inc. (HRB), Wells Fargo & Company (WFC), Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), AFLAC Inc. (AFL), Darden Restaurants Inc. (DRI), Sears Holdings Corporation (SHLD), Starbucks Corp. (SBUX), eBay Inc. (EBAY), Cabela's Inc. (CAB)

In the following excerpt from the Large-Cap Value Investing Report, an experienced portfolio manager discusses his top picks:

TWST: Are there any other examples you'd share?

Mr. Smead: We are believers that housing is going to make a big comeback in the next five to 10 years. There are 85 million Baby Boomers' kids. They have been a little slow to marry, a little slow to have kids, and because of the housing debacle in the last five years, a little slow to buy houses. But they'll get older and they will get married, they will have kids and they will buy houses.

From a mathematical standpoint, in 1960, we had 160 million people in the United States; today, we have 315 million. From 1960 to 1980, the deepest recession took us to 550,000 housing starts. In 2011, there were 320,000 housing starts in the United States, with a 315 million population. We believe that over the next five to seven years, we will gravitate to 1.5 million housing starts, which would be nearly five times what last year was.

If that happens, that will be a huge positive factor in blue-collar employment in the United States. Not only the carpenters, electricians, plumbers and other subcontractors, but people that make carpet, make paints, make siding, make you-name-it - anything that has to do with building and outfitting a house - all of the blue-collar trades that have been negatively impacted by the housing depression will make a comeback, we believe.

So we very much like H&R Block (HRB), because that is whose taxes they prepare. Those folks have been unemployed and not paying H&R Block to do their taxes while they're unemployed, and when they go back to making $70,000 or $80,000 a year in the next five years to seven years, they are going to be walking into Block by the bucket loads.

On top of that, of course, the United States federal government and our political people always seem to like to make the tax code more complicated all the time, so even among others, all the time there are people that need tax help that haven't needed it before. So we think that's a wonderful backdoor play.

And by the way, Gannett is also a backdoor play on that, because among community newspapers' largest advertisers are auto dealerships and residential real estate brokerages. So as housing comes back, it will be positive for Block, and it will be positive for Gannett.

We own in our portfolio Wells Fargo (WFC), Bank of America (BAC) and JPMorgan (JPM), and between the three of them, they own way over a million homes that are in foreclosure or default in one way or another. We think there is incredible leverage to their balance sheet from a housing recovery, so we have added to them in the last year.

The next one I enjoy talking about is Aflac (AFL). There was a news report yesterday or the day before that said that Darden Restaurants (DRI) and Sears (SHLD) are opting to give each employee a certain amount of money that they would have spent on them anyway for health care, and then sending them to an online marketplace to buy their benefits. We think this is symptomatic of where corporate America will go. Corporate America is going to raise deductibles. When deductibles are raised, the larger companies more than likely offer Aflac supplemental health insurance benefits as a voluntary thing on the menu, and when people that have their deductible go up from, say, $500 to $1,000, it will be very interesting to them to consider a $15 or $20 a month payment to Aflac to cover that difference between $500 and $1,000, which, by the way, is what Aflac has been doing in Japan for the last 30 or 40 years. So you've got this most unusual circumstance where one of the most successfully branded companies in the United States is just beginning to have the economics of what they do open up.

This is a company that does 75% of its revenue in Japan, and we think they have enormous growth potential in the United States, trades at close to seven times earning, pays a solid dividend, and has loads of operating opportunity right here in the U.S.A. over the next 10 years.

TWST: Has there been any significant change in the portfolio in the last year or so? And what's your typical turnover rate?

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