‘Virtual Guarantee’ This Sector ‘Will Crash And Burn’, Warns Fund Manager | Bill Smead
Speakers
Bill Smead
— Founder, CIO, Smead Capital Management
Summary
Bill Smead warns that the stock market is in a mania, particularly in semiconductors and AI, and predicts a crash. He is bullish on energy stocks, regional banks, and homebuilders, citing undervaluation and demographic demand. He expects interest rates to rise and the S&P 500 to perform poorly over the next decade.
- Smead believes semiconductors are in a mania and will crash, drawing parallels to past bubbles.
- He argues the S&P 500 is overvalued and likely to deliver negative returns over the next ten years.
- Energy stocks (Apache, Occidental, Cenovus) are deeply undervalued with strong free cash flow and buybacks.
- Regional banks like Fifth Third and Western Alliance are favored over large investment banks.
- Homebuilders (LGI Homes, D.R. Horton, NVR) benefit from low supply and strong demographic demand.
- Smead expects oil prices to stay elevated due to supply constraints, not fall to $60.
- He predicts a shakeout in the financial advisor industry if markets turn sour.
- The interview covers the end of the low-rate era and the shift from passive to active investing.
Ideas
S&P 500 has no chance.
The S&P 500 is starting from extreme valuations (high CAPE, Buffett indicator) and interest rates are rising. Historically, when the index has been in a similar situation, it lost money over the next 10 years. There is no chance for the S&P 500 to do well in the coming decade.
Chip stocks will crash and burn.
Semiconductors are the most cyclical business in the industry. No matter how profitable they get for a year or two, it is a virtual guarantee they will crash and burn because they always do. There is no clarity on whether AI capex will be monetized; historically, only a few companies succeed. The current excitement mirrors past manias and will end badly.
Oil companies are very undervalued.
Oil companies are very undervalued at $90 oil. Free cash flow generation is outstanding – they can make a year's worth of money in 90 days. Companies are buying back stock and the industry is due for consolidation. The market is pricing oil at $70, but demand is likely to rise with population growth and supply constraints.
Regional banks are attractive now.
We trimmed big financials exposed to investment markets and emphasized regional banks that are basic deposit-and-loan institutions. These banks are less susceptible to a stock market correction and will benefit from a shakeout in the financial advisor industry. Fifth Third and Western Alliance are examples.
Homebuilders have bright future.
Homebuilders are undervalued because new home construction relative to population is at 60-year lows while demand from large demographic cohorts is strong. Wealthy older investors are likely to buy homes for rental or to help children with down payments. Buffett's purchase of Taylor Morrison validates the thesis. We own LGI Homes, D.R. Horton, and NVR.
