As investors run for cover, this fund manager is buying energy companies, shopping malls and home builders

Investors err in trying to gauge the future via the stock market, rather than view it as a vehicle to serve them, he says. “Because it’s often your opportunity cost that kills you — what you could have done with money otherwise.”

“What is being availed to investors right now is capital intensive businesses that have some form of cyclicality and because everyone’s been so afraid that the Fed would cripple the economy and cause big economic problems…you can buy well-priced business that aren’t the businesses that people liked in the last decade,” said Smead.

Energy is an example of this, and a sector Smead said the firm hated from 2011 until early 2019, until it realized energy supplies were just getting tighter. The sector has “killed it from a one and two-year perspective,” but still only comprises 4.5% of the S&P 500
SPX,
-0.16%,
he notes.

“We would not be shocked if you could wake up in the teens looking over the next decade. Why? We’ll go back to the 1970s, when the inflation Zeitgeist became supreme in the minds of investors, places like energy did incredibly well, places like single-family housing made money in real terms,” he said.

What didn’t do well then, was bonds or the stock market in general — he thinks we’re halfway through a bear market. It’s a similar setup now, and investors would be taking advantage of a similar situation now if they realized inflation is sticky, he said.

“So the energy business looks incredible to us. I mean in our U.S. portfolio, we own 23% energy and we’re just playing a different game,” he said. Among the stocks the firm owns are Occidental Petroleum
OXY,
+4.29%,
ConocoPhillips
COP,
+1.08%
and Chevron
CVX,
+1.17%
in the Smead Value Fund
SVFAX,
+0.46%.
In its International Value Fund , it also holds Canadian companies MEG Energy
MEG,
+2.71%
and Cenovus Energy
CVE,
+2.57%.

Another area he likes — classic American shopping malls, which didn’t get killed off as expected by the pandemic, though new ones won’t likely be built soon as “that is still very psychologically damaging to investors.” And for companies with great mall space assets, that means no new competition for maybe five years, he says.

“Secondly, the labor that builds those kinds of buildings is getting more and more expensive. So let’s say you just have five years worth, it’s probably going to cost you 25% more in five years to build those same assets today, which means the cost of replacement is growing and growing and growing,” he said. To play this, the firm owns Simon Property
SPG,
+0.82%
and Macerich
MAC,
+1.03%
in its Smead Value Fund
SVFAX,
+0.46%.

He also likes home builders, which were weighed by fears of a hard hit by Fed tightening, something that hasn’t happened, because housing supply is “way too tight.” A couple of stocks owned in this space are NVR
NVR,
+0.71%,
a home builder that doesn’t own any land, and D.R. Horton
DHI,
+0.43%,
which only owns 25% of its land.

“So we’re moving away from the idea that home builders have to be land developers, which means think of the pullback in housing. Well, does it affect the balance sheet of the business? No, because they don’t own the land,” he said. “They’re just putting the houses there, they’re just building the house, which means the return on equity through the cycle is higher there. They’re not taking the balance sheet risks through the cycle, which means people should be paying higher multiples.”

Read: 11 stocks in the S&P 500 expected to form an exclusive growth club for investors

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