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A Hard Day's Night

- By Smead Capital Management

On a recent business flight, I watched the Beatles documentary ("Eight Days a Week") which featured the song "A Hard Day's Night." The movie chronicled, via previously unseen footage, the early years of the Beatles and the mania surrounding their tours and albums. This documentary and song could teach us how to navigate the stock market in the U.S. and what demographics mean to American culture and economic trends.


"It's been a hard day's night, and I been working like a dog

It's been a hard day's night, I should be sleeping like a log

But when I get home to you I find the things that you do

Will make me feel all right."

For anyone expecting to satisfy their long-duration return needs in the Standard & Poor's 500 Index, the next 10 years could be a "hard day's night." Prices in relation to earnings (P/E ratios) are elevated - popular tech favorites are extremely expensive - and effectively have overloaded the index and private equity portfolios. This has occurred while cyclical energy holdings are asking for a Hail Mary from higher oil prices. In our view, realistic expectations in returns of the S&P 500 for the next 10 years might be in the range of 5% per year (counting dividends/before expenses) from a historical standpoint.

When we "get home" to our concentrated and high-active share portfolio, based on our eight criteria for stock selection, it makes us "feel all right." Our portfolio trades at a significant discount to both the S&P 500 and the Russell 1000 Value Index and over the next 10 years could provide us a favorable time arbitrage spread. Add in the fact that our companies are qualitatively superior on average (better balance sheets, free-cash flow, longer histories of success, more shareholder friendly and stronger insider ownership), and it's easy to see why we believe you'll benefit from "the things that we do."

"You know I work all day to get you money to buy you things

And it's worth it just to hear you say you're going to give me everything

So why on earth should I moan, 'cause when I get you alone

You know I feel OK."

If we "could get you alone," we'd show you the demographics that bode well for a minority of S&P's 502 companies. A baby boom among 30- to 40-year-old women, a big uptick in household formation and a huge jump in the population of 35- to 44-year-old Americans could help us to "get you money to buy you things." This is true if you let your portfolio be dominated by economic forces that work on Main Street as opposed to Wall Street. It means you need to avoid the euphoric episode associated with technology that is currently centered in Palo Alto, California, and Seattle.

In the documentary, the Beatles were attractive, bustling with energy and artistically brilliant. However, "Beatlemania" was fed as well by the massive number of 10- to 20-year-olds in the U.S. and the rest of the developed world. These same Beatle fans caused a housing boom in America from 1975 to 1985 at historically high mortgage rates!

"When I'm home everything seems to be right

When I'm home feeling you holding me tight, tight."

We are very much at "home" with a portfolio heavy with home builders ( Lennar Corp. [LEN]), home renovation (Home Depot [HD]), cable/high speed internet access (Comcast [CMCSK]), HGTV or the Food Network, (Scripps Networks Interactive [SNI]) and local network news programming (Tegna [TGNA]). This means we need to "hold" our portfolio very "tight" as an expensive index gets gyrated in the next five years. Here is what Wall Street Journal writer Paul Overberg wrote in his March 23 blog titled, "The Outer Suburbs Are Once Again Outgrowing Cities": (2)


Last year saw the strongest evidence yet that Americans are returning to traditional patterns in where they move - from cities to suburbs and from North to South - after a recession-driven pause of nearly a decade.

Central counties of metropolitan areas grew 0.7% last year while outlying counties grew 1%, according to new Census Bureau population estimates for the year that ended July 1.



If we are patient and stick to our discipline, we could navigate the next 10 years with an advantage over the S&P 500 and many other active managers. In spite of a possible "Hard Day's Night" scenario, we could be "sleeping like a log" with underloved, quality common stocks tilted toward the economic needs of 30- to 40-year-old families. This combination could make us "feel all right."

(1) Source: The Beatles, "A Hard Day's Night" lyrics

(2) Source: The Wall Street Journal

Disclosure: Smead Capital holds Lennar, Home Depot, Comcast, Scripps Networks Interactive and Tegna .

The information contained in this missive represents Smead Capital Management's opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO and CEO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

This Missive and others are available at www.smeadcap.com.

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