As concerns about inflation resurface, one major stock-market investor is strategically positioning itself for what could be a long-lasting trend. William Smead, Chief Investment Officer at Phoenix-based Smead Capital Management, which manages assets worth $5.83 billion, reveals their strategy in a recent note.
Inflation Beneficiaries in Focus
Smead Capital Management is heavily invested in stocks that stand to benefit from inflation. Notable holdings include oil and gas stocks as well as valuable real estate. They particularly favor companies such as D.R. Horton, a prominent home builder, Simon Property Group, a real estate investment trust specializing in shopping malls, and APA Corp, an energy company. The goal is to secure a share of the profits from a seemingly overvalued stock market.
Inflation Concerns Trigger Market Reaction
The three major U.S. stock indexes experienced losses in the final hour of trading on Wednesday. The trigger was the release of ISM data revealing continued expansion in the services sector for the eighth consecutive month in August. This report stoked fears about inflation, causing an increase in two-month through 10-year Treasury yields and a slight uptick in the market's expectation of another rate hike by the Federal Reserve in either November or December.
Market Price Assumptions
Smead highlights that the current stock market is priced under the assumption that inflation will subside. However, he warns that government policies discouraging fossil fuel production might lead to higher oil prices for an extended period. Coupled with labor demands for increased wages, cost-push and demand-pull inflation reminiscent of the 1970s may arise. Given the potential for a decade-long battle with inflation, Smead predicts a contraction in growth stock price-to-earnings multiples over time.
William Smead serves as the lead portfolio manager for the Smead Value Fund, with assets totaling nearly $4.7 billion. This fund predominantly invests in large-cap U.S. companies like D.R. Horton and Simon Property Group. Other notable holdings include Occidental Petroleum Corp., Lennar Corp., Merck & Co., and American Express Co.