The Revenge of the Value Investor

We are saying that the United States economy is going to do really well because we are spending like drunken sailors on leaving our entitlement programs. The S&P 500, which is no longer the diversified portfolio. It used to be not on tech, not on growth stocks. We are on location in Arizona. We've got Bill and Cole Smith on the show. The father and son duo manage five and a half billion dollars and they've got a warning for investors. What we're dealing with is too many fools chasing their dreams in stocks. It's the revenge of the value investor. Since '09, have you been worried for a Lehman o'clock? Google, meta. That's this generation's nortel. This is a sector that even Canadian fund managers turn their back on. I would say everyone's got a daddy. Here's my dad. Here's your dad. When you choose a Raymond James advisor, you're getting more than independent financial management. 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The host and guest may maintain positions in any securities discussed on the podcast. Always consult with a qualified financial advisor or professional before making any investment decisions. In this episode, we discuss United Health and Tamron Valley, which are both stocks I own. Hi, everyone. Welcome to a very special episode of In the Money with Amber Canwar. We are live in Phoenix, my very first time in Arizona. And I am so grateful to have been invited here by Smead Capital, not just one, but two Smeeds. We have Bill and Cole Smead. Thank you so much for having me. Thanks for being here. This is great. This is a lot of fun and we've gotten to know each other cool because you've done a bunch of interviews with me talking about Canadian energy stocks. And you've got a little bit of the Canadian bug. You're going to be entering the Canadian markets at some point this year. So we'll look forward to that development. But this is my first time interviewing a father-son duo, if you can believe that. Which I bet you probably can. I would just love to know, like, how does this all work? Well, let the chairman go himself. Well, you know, it's worked extremely well. What happened was Cole had been in the industry. And it's very difficult to create a clientele as a financial advisor when your dad has been in the business for 25 or 30 years. And has all the relatives, all the family, friends, you know, we even went to the same college. So anyway, so we started the company in '07. So you started together? Yeah, I started day one with the company. And then his role is just grown and grown and grown and grown. And the good news is he's a masked earner. He just loves to absorb and learn and so forth. So he worked out quite well. And it didn't take too many years that he was added as a portfolio manager on the main fund. I don't remember exactly what year, but it wasn't that much longer. And so at that time we had myself and two co-managers. And anyway, so yeah, now it just, he's adapted quite well internationally. It's a great thing to pursue. Because we like the logic and the structure we have for stock selection and to turn it on more undervalued markets in the United States has been a great thing. And it's interesting how you guys lit it up. You're kind of not overlapping. You focus bill on domestic and call your looking at international opportunities. Yeah, our team works conjunctively. So concurrently, I should say. So like we have three analysts that work with us. They'll be here the next couple days at our event. And our team, we'll go one second from looking at a UK stock and next thing, we'll be looking at a US company. You know, there are things that can run in comments. So for example, we've looked a lot at the REITs lately. Some of the problems in the diversified REITs in Canada are some of the same things that we're seeing in public markets in the United States. So I would say in general, you can see things that are similar. Go watch the SaaS destruction of, say, the constellation softwares. That's happening in the US as well. So there's not absolutely different things. But like the many of tech, that's a US thing. That's not a foreign thing in comparison. Yeah. And the foundation of it is in the international, we're working off the eight criteria for a common stock selection. So having that eight criteria. And then Cole and the analyst team have added some kind of views based on return on invested capital that actually shine quite well on things we've already owned for a long time. But then also make an additional way of using the eight criteria to drill down. In other words, would you like to own this entire business yourself as a private business? Correct. It is the way of thinking about it. So you apply that domestically. Cole applies that abroad. It's the same. Yeah. So he leads our US work. So when I say leads, he's the final decision maker there. And we're all working together on that. And then I'm the lead decision maker for international portfolio. That's where the buck stops. We like accountability. We like transparency. If our US portfolio doesn't do well, they're going to go to bill. If we don't do well internationally, they're going to come to me. Yeah. And friction, the fewer decisions we make the smarter we are. Right. Or as someone once said, if you rub a bar of soap, it gets smaller and smaller. So we put a lot of effort into figuring out what to buy. And then we try to keep our turnover at a minimum. And that is one of the secrets, I think, of our long-term success. And I grew up in a family business. So I feel like I can say this. The way you might talk to your chairman is maybe a little bit more direct. Even if it's in our office, then if it was not your father, that might be true. That might be the biggest understatement of the entire week, the entire conference. So let's talk about the results. We'll just leave it at that. Let's do that. And talk about the results of this. Because this is a really interesting time to have US fund manager and an international fund manager. Because one of the big questions right now is, are we seeing the end of US outperformance relative to international equities? Are you too aligned on what the answer is? Yeah. There's a lot more cheap stocks outside the United States. The United States, my topic tomorrow, is going to flush out the risk. That Jack Bogle did a brilliant thing in the United States, gosh, 40 years ago. He said, you know, if you just owned 500 companies and rode through the ups and downs of the market, it would do great for you. That was the S&P 500 index. And it started out being a highly diversified portfolio of 500 stocks. Well, it no longer is. It's got 40% in the top 10 or 15 holdings. It in effect is making stockpicks, which was the whole idea behind doing it was to get away from making stockpicks. The second thing, we've had the biggest 15 year stretch in successful momentum investing in US history. There's never been a better stretch. In other words, you bought the best performing stock of the year before. The next year, you did great 15 years in a row. And that's never happened before. So what we've got here is a market that is just begging for trouble and getting a feeling among investors that active investing is dead. And that is beautiful because what would Munger say or Buffett Munger say about the best way to succeed is what? Well, the secret to life's weak competition. So let me add one more thing to that. So you get cheap stocks. But then the other thing that's really important is historically speaking, the return equity of American business has been the highest in the world. And I say that because there's been good capital allocation historically in the US. So for example, things like stock buybacks, they're kind of looked at as, oh, that's an American practice. It's not American. It's called human. But we treated it as that kind of that weird idea. So what we see now is a broad as you got cheap stocks. And we're starting to see good capital allocation to show up in the form of stock buybacks. And you've heard us talk a lot about that outside the United States. First is at the prices that some of these US business are going off. You wouldn't want to buy back any stock. What are they doing? They're still buying back stock. And so I point out that the capital allocation is enhancing the returns more than people think because back to Bill's point, the stocks are cheap. Now, have you always had this philosophy, be honest, have you, like, since '09, have you been worried? I feel like there's a certain type of investor that's always waiting for Lehman o'clock. Or were you, Lehman o'clock? I've not heard of that before. Or were you constructive? And is there something different about this time? Well, we're talking about the history of the discipline. Yeah, so in about 1983, I was at Drexel-Bernham-Wambeer, which was a great company for a while, and then it folded up in 1989. And we brought a closed-end fund public called the Z7 fund, and the guy had seven criteria for common stock selection. Well, when I was handicapping Greyhounds, while I was working at the Camus Paper Mill in the-- Sports betting on Greyhounds is what that means. Yeah, yeah. In the summers, you know, from '76 to 1980, I had five things that I was looking for in a race. I was trying to find a dog that fit five characteristics. And so this guy had seven characteristics. He was looking for in stock picking. And I looked at that. That's what's missing. I've been picking stocks for three years already. God knows what I was picking. And why? I actually did pitch Coca-Cola six times or he's paying a five percent, just given it in 1981. And everyone said no, because they could earn 15 percent in a treasury. Right. So anyway, so I said I need my own. So what I did, I co-opted about four of the qualitative things. But then there were certain things that I added to it. The problem was strong insider ownership, preferably with recent purchases. And that's one thing Cole has done a brilliant job in the International Fund with is that he has grasped that and really run with it. So he looks for wealthy people in countries outside the United States that are very successful personally in their track record. So if Paterson owns a lot of his company, that makes us way more interested in the company. And that's been true in our United States and that's been true outside the United States. And so we came up with eight criteria for common stock selection. Some of them are qualitative, strong balance sheet, et cetera. Then now the with the market's been so good for so long and so many goofy things going on. Now we've leaned in to the idea that hey, it's a return on invested capital that matters, which is just it's within the context of those eight criteria. And sorry, but to answer my question, have you have you been bullish up until this point? Well, let's get a question. We're always bullish on our portfolio. These two portfolios are the only common stocks that Bill and Becky's meet own or Cole and Katie's meet. So in other words, I don't have any one offs. And by the way, sometimes the urge to do a one off is intense. Two years ago, two and a half years ago, I was at the London Value Conference. And they asked us to pitch a stock at the London Value Conference. And the first speaker was Ben Incker. So Ben Incker comes in and does all this neat, academic evidence of why it's good time to look at value. So I get up there and I'm pitching Simon properties at 102 with a 7% dividend. And I can remember it crossing my mind at that time. If I was ever going to break my rule and buy an individual stock, that was a no-brainer at that time. But anyway, so I haven't done that. So again, we're eating exactly the same cooking that our investors see. I think what's different is, I remember in the bottom of the nine, we'd go to folks and we say, gosh, stocks are so cheap. It's a great time to get involved. Could we be the conduit of your investment selection for the great market? And the answer was, we were young, unknown as a standalone entity. We were less than two years out the gate. And we were bullish as I'll get out. I remember Bill did a presentation called Bull Markets 2. And the idea was like, what components of a stew do you want to have for a good bull market? Here we sit today and it's like, everyone can tell you how great the market's been and everyone can tell you, just up and to the right, just close your eyes as they say. And the problem with that is that's where the psychology is. No one wants to own stocks back then. Pitching gold was a better sales pitch back then. Owning treasuries was a better sales pitch. Commodities were a better sales pitch. Fast forward to now. Those other things don't look as lustre-filled. And actually, Bill, you were saying before we started recording, like all those things that had you constructive in '09, everything is reversed. And so you're not as constructive now. Well, certainly on the S&P 500, which is no longer the diversified portfolio. It mortifies me to watch people justify six months ago, 52 times earnings at Costco. Costco is a wonderful company. But there's never been a company that big that's ever been able to grow enough to justify paying 52 times earnings to buy it. So this whole growth stock and momentum and quality, basically, you know, monger convinced Buffett in the early 1970s to find wonderful businesses at a reasonable price or a low price and hold on to them for a long time. With wide modes and high quality. Well, wide mode and high quality is so popular. They just had the barons had their round table. Right. And just listening to those people, I just thought, gosh, I didn't hear an original thought in 15 people. I mean, it was like, they need me something terrible. We're going to get those original thoughts because you can bet that we've got those stock ideas. It sounds like what you guys are talking about is 2026 is going to be the revenge of the value investor. It could be, but here's the weird part. We've talked a lot about this. This last week, we were visiting with the trustees or our fund, for example, and having the same discussion. If you look at value, let's use the Russ 1000 value. The biggest holding in the Russ 1000 value is Google. Okay. So I made this joke. Most people don't even get it. Probably don't find me funny, but I say, like, even value doesn't know what it is. That's the interesting part. If I go look at the average value portfolio bill or I will look and say that doesn't like value to us. Because it trades at a discount to the S&P, it's the most expensive S&P in my 45 years in the business. They think, oh, this company is 20 times earnings. Therefore, it's value. Let's talk about two areas of the market. I think I know what you're going to say, but let's talk tech. Do you not own any tech stocks? And what do you see as the ultimate conclusion of the trillions that are being spent to build out AI infrastructure? We own Qualcomm in the S portfolio and then formerly tech, now consider discretionary as eBay. We've always liked eBay because it's like the red-headed stepchild of tech. It's just never been Amazon. Why do we attract those two businesses to Bill's point earlier? They have good capital structures, they produce good returns. In fact, eBay is way out-performing PayPal as an example. PayPal was formerly the more exciting part of the business as an example. So, use this environment right now, the SaaS world, software as a service, just to describe that for all the listeners. When I say software as a service, just to put some names out there, it's the work days of the world, it's sales force, it's service now, it's all those kind of businesses, apploven. Constellations. Constellation software in Canada. Open techs is out there. I say that because that world is getting crushed. Those were the former darling quality growth stories. The only place that really hasn't underperform is the big cap tech or what we call internally, the hyperscalers. What do we like in this too? This will be to Bill's point, this will be what my presentation is on tomorrow. In effect, I think we think of the hyperscalers like the telecoms of the late 90s. So, in Canadian parlance, Norteil, which was 30% of the TSX back then, at the height. And so, those were the real losers. Norteil was gone within 10 years. AT&T and Verizon in the United States context have been 25 years losers. Like Google, Meta. But they all came out of that. But here's the catch. No, no, I'm saying that's this generation's Norteil. Well, here's why I say it. Because if you look at the forward returns of say the survivors, AT&T and Verizon, they made 5% compounded for 20 years. These were phone companies. I'm going to push back on this because people who have been scared out of those stocks, you've been scared out of making money. Meta is a really lovely business for a shareholder. Invidia is not an unprofitable tech company. It's spitting out billions of free cash. Well, I agree. So, here's where the paradigm changes. So, the difference is, so again, let's go back to the 90s. So, the telecoms were the capital-intensive part of that media, or what I call the CAPEX media. Now, were the.coms part of that CAPEX? No. They didn't have to spend any CAPEX. It was all OPEX. Was Microsoft spending a bunch of CAPEX? The answer is no. It was all OPEX. So, let's say we don't know what the industry is, and we're just sitting down and playing a game of, okay, you say, "Bill Cole, would you rather have a capital-intensive business or an asset-light business?" What would you rather have? And we'd say, "Well, asset-light." Because it doesn't need any capital. And the best business or don't require any more capital. What's interesting about this is these businesses were asset-light. And they're now going to a transition of being the most capital-intensive businesses in the world. Now, what actually happens when you become a capital-intensive business, your returns go down. Returns on capital. And so, as you look at this, the difference is they were the ones that didn't have to spend the CAPEX 99. And now they're the ones that have to spend the CAPEX. And history never repeats itself, but it rhymes. So, we have a chart that shows the 10 largest CAPEX companies in the world at the end of every 10 years, in 1980, 1990, 2000, 2010, and 2020. That list changed almost completely every 10 years. The largest in 1986 of top eight were oil companies. In 1998, the 10 were Japanese stocks, which by the way, not only led to a bear market, led to a 30-year bear market in Japan. That market basically ceased to exist for 30 years. In 2000, it was the.com bubble. It was laced with the tech bubble. 2010 was the brick trade, central broth, the whole dig up Western Australia. Stick it on a barge and take it and build a condo building in Shanghai. That was 2010, and then 2020 was the fangs, and now-- >> It's Facebook Apple Amazon Netflix Google. >> Yeah, Facebook, Amazon Netflix Google, or Apple. And now it's morphed into the magnificent 7. And the problem is that all recorded history is not going to get rearranged for the benefit of these investors. What I like to say is, show me anywhere in the older New Testament of the Bible that God said everybody's supposed to make a lot of money on their stocks without having to even play any serious thought to it. And the answer is, it's not in there, it's not going to happen. All you know is something really bad is going to happen to stock market prices of the over-owned most popular things. And that is coming. Now, does that mean you can't make money in common stocks? And the answer is no. For example, from 2000 to 2010, Buffett, who warned everybody at the Allen & Company Summit in the summer of '99 about how overvalued stocks were, he made 5.8% while the S&P fell 0.9% compounded for 10 years. The last decade, the end of '99, the end of '09, lost decade for the S&P. No money. Made no money. Okay. And so that's the problem. And then for that to be true, it's got to be worse in the big concentrated positions because we've got to turn over who the top 10 are every 10 years. But by the way, Exxon and Microsoft in those five decades are the only two companies that made it twice or more. Can I counter that with this idea that those stocks aren't as expensive? Take a Google, take an Nvidia. And Google is actually growing faster now because it is seeing a return on the investment since making it. The oil stocks were not expensive in 1980. They were cheaper than the other stocks. To your point, our view is not that their revenue isn't growing. And that's not the catch. The catch is that their returns on capital are declining. So I'll throw some quick numbers out to your listeners. And we have seen this group stall. Yeah. There are canaries in the coal mine that show that oxygen is starting to get low. So we looked at meta's recent year because they just reported this last week. So they use an extra $45 billion. By the way, just stop and think they use an extra $45 billion to run the business. What was the return on that $45 billion? Now, if you look at net income, they would say that they made about 3% return on that added capital. Now, no one's going to be like, wow, what an incredible number, 3% return. If you use free cash, well, they lost free cash off that incremental return. So what's weird to us is we're saying, these are terrible, terrible year over your numbers. Microsoft said the same thing. We grew our capital base a lot, making investments. And because the revenue growth wasn't as much as they wanted, they absolutely torn apart that same day. Now, what was the difference? They were both bad returns on incremental invested capital. So that doesn't matter. The revenue growth does not. So let's go back to the dot com bubble. Okay. So what happened was, in fact, I was sitting at I was a member of Seattle Rotary and a Microsoft reported earnings on December the 27th of 1999 and the stock soared that day up 6% and became a $500 billion market capital. Which was the biggest at the time. Three months later, like clockwork, Cisco had reported earnings and they soared to a $600 billion market cap. Cisco just passed that number recently. And they're like 12 times as big a company as they were then. Okay. See, the problem isn't whether the underlying business survives and is important. That's not what we're dealing with here. What we're dealing with is too many fools chasing their dreams and stocks that have already made the people that are going to get wealthy from being involved in them wealthy already. And let me add something to this. This is one of my favorite subjects now. And you might not have heard this, but there's an old saying, you know, why did Willie Sutton rob banks? Have you heard that before? Tell me. Because that's where the money is. Okay. So a lot of people ask us, it's like, what will change here? At some point in time, those businesses will get robbed of their capital for people to do other things. Now, when the stock market turns sour on the S&P, there's going to be two forces. First of all, if those concentrated positions become difficult, people will sell those. And that will automatically cause people to do poorly in the S&P causing some of their owners to turn in their shares, which automatically hits those biggest ones the most, which causes them to go down, which will cause somebody to want to sell them. And you just get going in a vicious, unvertuous circle, the wrong direction. We've had the virtuous circle going for 15 years. Just imagine how much torment. Now, everybody asks us, when will mortgage rates go down? That's when mortgage rates will go down because that's where the money is for people to get scared. Then what they will do is they will want to earn interest and that will drive mortgage rates down. And the 20 to 40 year olds who aren't yet married and don't yet have kids who've been participating in the stock market will see it turn sour. And by the way, their attitude will change really fast. They'll go from loving the stock market to not caring about it at all. And going back to their social media feed to figure out whatever they figure out there. I haven't quite figured out what they figure out. Anyway. And they'll go, no, no, no. Here's what will happen. And this is the way it was when I started the investment business in 1980. I would call business owners and I'd say, hey, could I call you when I get a good idea? They'd say, yeah, you could call me. I say, well, what do you own right now? I said, I own the business. I own the building the businesses in. I own two rentals. I own a couple of oil stocks and I have some gold. A young person wanted to invest between 20 and 40 bought a house. Maybe they lived in it. Maybe they rented it. Why? Because it protected against inflation. And stocks had done horrendously from 1969 to 1981. So they just looked or do I want to put my money into this thing? It's done terrible. Or do I want to put this thing in some tangible way that I can get some money back from it? And we will go there. You watch. We are going to go there. And over the next 10 years in a big way. And your solution is still staying invested, but finding those other pockets like housing. I don't hear you hiding out in gold. And I think a lot of people think, okay, if I'm listening to you, you're calling for some big, big disaster. Why don't you hide in gold? You're hitting on one of my favorite subjects, the thing that triggered us. And if people look at our portfolio and think, gosh, this is different than what this means used to do. In May, 1st of 2020, Barry Bannister at Stiefelnick was put out a chart going back 220 years. And it was comparing how stocks had done compared to commodities. And when the Saudis took oil to zero in April of 2020, that was the worst point in an entire 220-year time period for commodities. So I believe that what this golden silver move is about is first think back what happened. We got very involved in the oil business. It was this coal recommended that we read the crackers by Greg Zuckerman, right? And we read it. And here's this guy, Harold Ham, who gave his wife a million dollars to go away so he could keep 82% of his company. And he was using the dividends every 90 days to buy 10 to 20 million dollars more of his own stock. And so we got involved big in the oil business. So we, from the low point on May 1st of 2020 to three years later, nobody in any category touched us. Well, I mean, we just smoked everybody. But even in commodities, what you have is a 20-year rotational bull market, just like the common stock market, the last 15 years has been very rotational with a lot of tech along the way, but very rotational. So golden silver are a perfect example. They've had this great bull run in a rotational bull market in commodities. They've done it on some of the inputs associated with electricity because copper is an example. And oil has been in a time out because President Trump has been after him and trying to job on the price of oil down to get his inflation numbers. So he can be very aggressive. He'd like the economy to run hot. So we're not saying the economy is going to do terrible. So I think the dichotomy or the paradox, if you will, is that a lot of people in the value world are like, oh, it's going to go so terrible and it's going to financial ruin and we're all going to fall off a cliff. That's not what we're saying. We are saying that the United States economy is going to do really well because we are spending like drunken sailors on leaving our entitlement programs, which means all the boomers collect their check. I do not fall into the camp of millennials that think we got rug pulled into society like much of the other 40 year olds I do run into nowadays. But I say that because ultimately it's a hot economy. Hot economies tend to cause lots of pressures on inputs at their base level, aka commodities. So is it surprising to see a silver or copper that have been under invested for years, pick up and then watch meme traders take advantage of it? No, that's not shocking at all. It's not dissimilar to kind of the price moves we saw in oil when that ripped. But you're not participating in it and you're still convicted. We don't mention that. We don't go into the copper market. They're in copper, zinc, nickel, and the coal business. So we're involved in there, but let's just use gold. People say, well, why don't you own gold? We'd say, well, gold is a better thing than the gold miners. The only problem is the gold miners are terrible place to get wealthy. Even when gold's good, they don't make money. What was buff? What was Buffett's thing about it? It's different this time, right? If you took all the gold bars in the world. If you took a cube, you just make a gold cube, and you say you can buy all the common stocks in the land. This is back in 11 at the shareholder meeting. You can take all the investable farm land out there, etc. So you get all that for the price of all the gold. What would you rather have? Because of the brick trade, everybody wanted gold, because the Chinese were getting to buy gold and they already had it. So we love the position that oil is just from the hated perspective. It's like, okay, great. By the lumber, lumber is really cheap. We're going to talk about that. No spoilers coming up in the pro pick. I do want to get into some of the mailbag, because I want to get as actionable as we can, and talk about how you express these views in the portfolio. And we got actually some questions, European banks, they're having their day in the sun, like they haven't shown in a long time. And I think you got, you guys own Barclays and Unicreddit. Correct. And Bowag. Yeah, Bowag as well. Okay. Talk to me about that trade, you know, how it got hot again, and whether there's legs in any of these names. If somebody has ignored the sector, because it's been money losing for years, why look at it now? Yeah, so this all really kind of started picking up a back in 22. Okay. I'll just give you a, I'll use Unicred as a simple example. Unicreddit back then was telling all their shareholders that they had all this excess capital. What happened during the pandemic was the ECB did not allow any capital be dispersed by the banks. If you go back to the tarp and all that with the US banks back in '08 or '09, what they did back then is you could not increase your dividend. In the case of the ECB during COVID, they said you can't use buybacks and release capital. So what happened is they built up all this capital. So you get done, they're still cheap, post COVID, and to your point, they've done so bad for so many years. There's like scars and people like, oh, banks, oh gross, those don't make money in Europe. And so, Orchelle comes to the helm. He says, hey, we have all this excess capital. We're way too cheap and we're going to run this bank more efficiently. This is Andre Orchelle. Orchelle from Unicreddit. He's a subon in our mind. He says this. He says this. He's a banker. He's a cosmon really good. One of our models is we'd much rather know who is smart than to be smart. And so he's jumped on that and found these international players that are super smart. And I'd also add that what we went through in starting the fund at the bottom in '08 and getting abused and watching what went on and then buying Bank of America. It was a great kind of petri dish for what we saw in the middle of Occupy Wall Street at that time. And then six months later, JP Morgan had the whale trade. They lost six billion dollars on the whale trade and their stock plummeted. And we jumped on that. We took advantage of those. There's one big difference. Back then, the US banks, their return had to go way up to be good. So you had to bet on the comm if you will in that situation. The European banks returns were already much higher and the metric we ran is we tracked book value per share. That's what we did. So we were looking to buy back stock for all these cheap prices. Book value per share growth would be higher than the return equity. So that was our working thesis is that if book value per share growth runs over 10%, you'll get book. And it was like, okay, great. Let's test this theory. The way we do that in this world is put money into it. And so you wake up and there's been incredible moves. The difference, though, is there is this view that, oh, they're Europeans, they're weak. That is just a natural weakness. So their economy is going to be weak. They're going to be foolish. And what's happened is the economy continues to say strong spreads and banking are great. One other thing I'll add. In Canada, the United States, we have pretty competitive banking markets. So, you know, I'll use Canada. If RBC is showing a price, everybody knows what the price is. Same thing here with like Bank America. Well, the difference in Europe, it's a negotiated deposit market. So like every person. Generally speaking. So what is your grandmother getting down at the local bank? Well, only your grandmother knows that. And if she wants to get a better rate, she's got to go talk to, you know, Giovanni down at the bank and find out what he's going to do today. And what I love about that is that means we can make better spreads because we don't got to tell our deposits what we're making. Yeah, so we like we like to buy stocks that don't they don't have to have a lot of things go right effectively. Let's let's see how you apply that and talk about some of the US stocks that you own in some sectors that maybe aren't getting a lot of love. But one of the one of the sectors is health care and you own Merck. Yeah, we own Merck and you know, we do our webcast each quarter and talk about our we feature one stock each time that we flush out the criteria. And what was it? Two quarters ago. Two quarters ago, we did Merck at like $83 a share. And now it's 110. And the whole health care space in general has been cheap because of what's been going on politically and politically. How did you pick Merck because there's, you know, well, first of all, we've owned it off and on for a long, long time. It's been a long time holding it. Now remember, first of all, I've had a dear friend get healed by immunoncology. And they completely own the market for immunoncology. The worry with them is what's your next act going to be that? That in the drug business, they always worry about well, well, you're making great money and you have these wonderful products. But you're big enough now you're going to have to have something great to replace that. Well, so does Apple. And so does most every other business. That's just the nature of business. But what they do is they take 18 to 20% of their revenue every year. And this is true for Amgen and the other pharmaceutical companies. And they put it into the major medical research institutions in the United States and all over the world. Okay, that they can't. And what happens is if you're at Fred Hutch, Cancer Research Institute and you're the funder of the research and they discover something that works, which immunoncology was discovered there, then you get to commercialize it. Okay, but you're taking 18 to 20% of your gross revenue. You're not depreciating that. You're just right up front, just boom. So their income statement is the most conservative income statement of anybody's because their most important long term investment is expensed up front quarterly, quarterly. And so the beauty of it is they're likely to come up with great things. And nobody else does that model. They typically it's an R&D model in. Yeah, and that's a typical biotech would be like grow your model sell to someone else. Okay. And in fact, these are distribution platforms with big R&D inside. Yeah. And so, so there's that. And so we've owned Amgen for since the fund started and a wonderful company. It's never really gotten. I mean, this is about as popular as it's gotten and it's not even to a market multiple. The only other one's going to say Merck is like 12 times. But the whole space has been cheap. We went and looked at the whole space. The only thing that really perturbed us, Amber, as we looked through the space of all the, you know, you run to these people where the future is so bright. And you're like, okay, so three years ago or two years ago, you had much higher stock prices. Why are you not buying back stock now at these lower prices? So the future is so unknowable. Yeah, but three years ago when your stock was higher, you were buying back a ton of stock. And it's like, we never know what the future brings. Let's at least allocate capital. So we like mean reversion traits. So we saw a chart that showed that healthcare was incredibly undervalued in relation to the rest of the S&P. Yeah. Therefore, we do some homework. And so that kind of leads into, okay, so here is the formerly most admired company in the entire healthcare space. The United Healthcare has a huge HIKI, has the President of the United States breathing down their neck, has earnings. You don't care about that policy headwinds? Well, no, no, no. Policy headwinds are what got us into Bank America and JP Morgan. You don't get to list with Warren then. I mean, that was intense pressure. I mean, there was intense pressure because everybody on both sides of the aisle was pretty unhappy with what happened in the banking industry. So the stock plummet, so we bought some at 300, then we bought some at 271. And why? Well, because it fits our 8 criteria, cold, just did that on the webcast, pretty much to a T. Do we know we're going to succeed? No. What we do is we take our shots. We take our shots. We'll probably be right about 60% of the time. But our differentiator over the long haul against our value peers is our value peers like to buy a cheap stock of $55 cent as computed by them. And when it gets to $85.90, they sell it and they go to another one. Well, the stock market's been going up for 15 years. What are you going to rotate to when things have been strong for 15 years? So what we do that our value peers don't do is we hold our winners to a fault. That was what my topic was for last year's thing was reinvesting unrealized gain and future gains. So for example, we've sat through the correction in the last year in the home builders. Why? Because we're the most underbuilt homes in the United States, just about ever. And there are more people between 20 and 40 than we've ever had. The average age of a first time home buyer is 40 years old. That shocked me when I heard that a week or two ago. That was to me that was shocking because when I graduated in college and you got a job, the first thing you want to do is buy a house because how much debt did you have? We put three percent down as a first time home buyer and we borrowed $92,000 and we're glad to do it because it's a four savings program. The reality is I'm old enough and I've watched the experience of enough human beings. There are way more people that have gotten wealthy owning homes than have ever gotten wealthy in the stock market. Which is crazy because actually the stock market has performed better. Yes, agree, but the average person can't take a lot of that volatility. The lack of gyrations, the lack of punishment is what's goading people into thinking it's not going to happen anymore. Okay, so any particular home builder? Well, Horton and Lanar are the Costco and Walmart of the home building business. They are for their for no, no, no, no, no, no, no, no, no, you're jumping ahead. Those two companies are 40% of the home building revenue in the United States of America. Horton provides the lowest cost brand new home in all 36 states. So it's Costco, right? You get the lowest cost home. And what's happening, the more difficulties there are in the next two years due to circumstances, due to Trump trying to get the institutional people out from buying homes. I don't care. You can list all the struggles. But those struggles are way harder on the smaller companies that don't have the spectacular balance sheets that these guys have. And don't have the better return on equity because they've all moved to a land light position, meaning they don't have to have that much capital tied up in their business. One of the more of an op-x business they can get back. It's more of an op-x. So therefore, whenever it gets good the next time, they are going to just cut a incredibly fat hog. So think about it. Watch your little terms. I assume that's good. Well, no, when you go to eat ham and stuff, you want to cut a fat hog. Everyone's probably like, oh my god, there's so much to this means I didn't know because up in Canada, they're like, I just thought Cole talked about energy. Yeah. Indian energy sucks and they've had to wait maybe 40 minutes into this conversation before I finally do bring up. We're learning, repealing the onion on the whole screen. Well, by the way, they also want to know like, you know, I would say everyone's got a daddy. Here's my daddy. Here's my daddy. That was like almost an iconic line where you were saying for anybody who missed that episode that in the Canadian energy sector, everybody needs a daddy, you mean? And so the sector is going to consolidate. So let's talk about the sector. Now, still remember you were on, you said, you know, this is your number one in the ex-US. Yeah, it's also our biggest energy holding in the US portfolio. And in the US portfolio, so you like it too. I mean, the sector has been so resilient to forget about the commodity prices still done so well. I hear, you know, if people are quibbling, it's like, I don't like the valuation. Yeah, Cole's got all the great, he can give you the greatest detail information on that. My thing is very simple. The Canadians have better dinosaurs. Yeah, that's what he likes saying. Yes, yes. The Permian Basin is going to roll over in the next two, three, four years. But we've turned over the market though. So it used to be Canadian discount. Yeah. So it's your point. Why is Tenovis outperformed a lot of the US players? Well, because the Canadian discount's gone away, generally speaking. Now, if someone says, okay, what are we doing in Canada particularly? Generally speaking, we fall into, let's go out and buy oil sands. We like oil sands, sag-de-assets. Because when they book, they book high reserve life to build point, right? So 25, 30 or greater years of, you know, I'll call it assets in general. Does that mean that's all we participate? No, I mean, Tamarack Valley is not an oil sands, you know, like that. But I say that that's our general MO. Versus if you look on our US side today, like, you know, for example, we own APA, we own conical Phillips, etc. Those are more attractively priced relative to the Canadian assets were. So there's been kind of a two year move. It's like all of Wall Street said, oh, hey, there's this thing called asset life. And they all started gravitating. That's why the Canadians have done very, at your point, very resilient in this. That being said, also, everyone knows there's a price and there's a market. So, you know, I was just at a conference recently and talking to some of the Canadian executives. And everyone's, you know, what's the price per flowing barrel that these stocks are trading for? And they're all looking at the multiples and asking, well, based on that, how do we lay out the stack? The last thing we've talked a lot about this last couple years in bull spaces, liquidity is important. So if you go out and say, well, who's done the best? The most liquid have done the best. Why? Because if you want to enter or exit the energy business, you can do that in the most liquid. So there's still a spread based on liquidity. And so as you've seen, like the Tamarack Valley from a year ago to today, what's going on? Is there a liquidity picks up? The valuation picks up too. Yeah. I'm going to give you the chance to talk a little bit of a Tamarack Valley because, yeah, it's a clear water play. But I know that you've been quite upset at some of their, basically they adopted a poison pill in case somebody comes along and tries to do a mega transaction. Yes. Yes. Cold loves to wrestle with boards. Yeah. No, not in general. So just, let me, so Tamarack Valley, they're doing everything. Yeah. Yeah. They're doing everything great. They're using, you know, as most people know, they're using water flooding, what they're getting out of those walls are incredible. The returns on Capitol are great. Steve, Brian, who's the CEO and Steve, who's the CFO, they're doing a great job. So we're big fans of Brian and Steve, okay. That being said, they came out in December with a poison pill, like you mentioned, where they want the shareholders to give the board a certain right. Commonly used, you know, referred to as a poison pill, where the board can set a price, the number of shares that the shareholders participate in. It basically prevents a hostile takeover. Okay. It's difficult. And I agree. So let's say we're running a mining business, and our, our all single asset is not going to be fully operable for three years. And someone comes in to swoop in to take us out before we're operable and getting the real value out of the mining asset. Okay. There's a good reason to have a periodic provision for a poison pill, because we don't want this to get taken away until the cash flow starts coming. That makes sense. And in a mining asset, I get that before it comes to market. In this case, we don't have that. So it makes no sense. Now, ultimately, what we've learned in Canada is there are Canadian securities laws, right. So for example, in a plan of arrangement, you have to get two thirds approval, kind of, you kind of have to get two thirds. As we learned with Meg, you don't have to. You could get less than that. And so when the boards have this much capacity and power to dominate shareholder rights already, why should we give them more? Like we learned in Meg, ultimately, what I love about the transaction is the shareholders got to say and do what they wanted. And that's how it should be. Have you got any feedback? Because I know you've been on it. It's like a month. Yeah, we've discussed it with management. We've let them know our two cents. Here's where I'm shocked at. And this will probably be like a shots fired thing, but I'm appalled that more people in Toronto do not care about this at all. I mean, they just don't say a word and they let them come and rob them of this right in the middle of the night and they're like, oh, well, just staring in the corner while someone's robbing Trump has kept him too busy. No, so I tell you why it's not it's it's likely not owned by anyone in Toronto. Sure. And I was not like we just the stocks have done well. The generals have started to come back, but this is a sector that even Canadian fund managers turn their back on. Can you believe in a country like Canada that is so rich in natural resources? I guess how many dedicated energy funds we have? Two. You know, so there's no one cares. But their largest storeholder is a Toronto fund, but did they did all things equal? I mean, I'm just they drink the ESG Kool-Aid up in Canada. But by the way, I was in Norway about I don't know if I call it Kool-Aid, but that would definitely you saw that. So I was in I was in Norway at a conference and not just that. Sorry, I'll finish, but also foreign investors, too many reasons walked away. So I was in Norway at an investment conference where we're supposed to try to appeal to the institutional type investors and so forth. And I got up there and I said ESG stands for extra stupid growth. Okay. From 2017 to 2021, like $500 billion was invested in US in ESG funds and ETF products. Yeah. And nothing was invested in the oil business. Okay. And now Musk is telling people he's getting out of making electric cars. Which, by the way, doesn't that just mean that that business is nothing but air? I mean, that's a whole other subject. But I mean, if they're not making cars. I think they're still making cars. Well, these are going to merge in maybe with SpaceX. Well, no, SpaceX isn't owned by Tesla. Not now. It's not in Tesla. So that doesn't give you any of that. I mean, what's in there? I mean, I'm going to make robots. Oh, that sounds like air to me. It's air. And you know what? People have that much faith in the guy. And they haven't talked to his ex-wives. I don't think. Having said that, solar stocks have doubled in the last month. So maybe there's a deep, deep value trade. Crickets. Okay. That is interesting. If you give him crickets, that's a big deal. Yeah. I pay like a, that's a, that's a badge of honor. Yeah. The rendered bill speechless. Let's get into some of your high conviction ideas, your pro picks. ProPix is brought to you by ATV Financial with over 100 billion in assets. ATV Financial's power and possibilities for more than 843,000 financial services clients. ATV Cornmark Capital Markets is a leading North American investment firm providing holistic corporate and capital markets advice and full service financial solutions. Visit ATV.com/inthemoney for more information. We have one from you, Bill. You've brought fifth third bank. So we've talked a lot about banks. How you bought the financials in the crisis. Something interesting is happening with these regional banks. They're starting to perform. But here's what's interesting is this crisis with United Health is following a very similar pattern to what happened when Silicon Valley and first Republic Bank in March of 2023 went into the dark hole. It's funny. I had a friend call me a couple of days after that. He said, Bill, I had $2 million on deposit at Silicon Valley Bank. What's going to happen to me? I said, oh, it's very simple. You're going to get $250,000 of that back. And you lost the rest of it. Now, what happened was they ended up standing behind those deposits, letting somebody else buy those two banks. And by the way, that's the most inflationary thing that's maybe. I mean, we've thrown 10 trillion at COVID. We're doing all these stimulative government things. But that was a big time sin. But anyway, the stocks of the regional banks plummeted. Well, we didn't know enough. What I thought was going to go on is he was going to lose $1,750,000 from that. So we didn't want to touch it then. So it ended up, they stood behind it, and they rallied. And then in November of 2023, there was a retest. People got scared on the economy. United Health was doing right. They got scared of the economy. It scared of that. And so we did some research. What we were looking for was strong balance sheet, very meritorious regional banks that were boring. Okay, we wanted boring. And so we came up with three Western Alliance that's doing a lot of great things in the market area. But they operate almost all across the country in various businesses they're in. We came up with fifth third and we came up with M&T and Buffalo. I mean, what could be more boring than being in Buffalo? So anyway, so fifth third. So we put 1% in each of them because their capitalizations were so low, they barely qualified to be in a large cap value portfolio. And what's happened since then is Western Alliance has done great and fifth third has done great. And then fifth third announced recently that they're buying Comarica. And we really liked that. It was good enough that Holco, one of the activists on it, were screaming from the top of a roof that they were taking advantage of Comarica shareholders. And so we think they got a really good price based on what we read in that deck. And when you buy a bank, there's like a 15 person executive team that is instantly unneeded. The cost saving synergies like the oil businesses we talked through in a prior time with Meg, just go look at SG&A, you're going to wipe a lot of that SG&A. The other thing, the tech stack in the banking business is a big deal. So you're taking all these scale, you're putting it together, it's just a scale game. And we think that same thing's going to happen in the US oil companies, there's going to be a lot of consultants. Same kind of SG&A idea with this. That's how you like APA, you make APA. We like APA. Yeah, they have 350 million of SG&A APA. And when you go talk to folks at APA and say, hey, it's like expenses selling generally. Yeah, just to, you know, cost around the business. Yeah. Even when they bought Kallen, we said, hey, how much did it cost in SG&A that you kept on? They said zero. And it's like, okay, so if someone comes into buy APA, I don't know, let's get it under, you know, 100 million of SG&A. Well, that's around five to 10 times. APA is a target. They should be. They have the offshore. And then Chevron attempted to buy Anadarko back in 2019 and Oxy outbid them. So if you look at today at $40 a share with Buffett owning 28% of Oxy, you're getting Anadarko and Oxy for about what they offered to buy Anadarko practically. And to their credit, Exxon and Chevron have told President Trump that, you know, it's pretty hard for us to justify our shareholders investing in the oil business in a country that flees us out of tens of billions of dollars. They confiscated their, so anyway, so it wouldn't take that much of, if you stay around $70 a barrel, there's going to be a lot of consolidation. I just want a point of clarification because he kept mentioning United Health. Is that a name that you're getting involved in? Yeah, we got in the fourth quarter. We put 2% of our portfolio into it through the end of last year. And why that time? Because the stock's been under pressure for some time. Yeah. So you've been watching it under pressure. But it's all the way down to where we bought it. Oh, yes, so I want to know. Which, which, I mean, we don't buy stuff for how we're going to do it six months. No, no. We buy stuff for how we're going to do in 10 years. Like you've been watching it under pressure. And then you only recently decided to step in. No, no, no, in the fourth quarter, we started buying. We bought it last year. Yeah, late last year. Yeah. Last year, but it's been, just so you know, April. Yeah, we looked at it 10 years prior to. We looked it back in 2018. We've been conscious of it for years because it's been a super well-run business. And they provide products and services that the United States government cannot live without. And so do you think it just goes back to 600? No, no, no. They're going to lose less than they did in the past. Okay. We think they'll work at their prices. Yeah, it'll go back there someday, but let's face it. Let's face it. If the S&P 500 loses money over the next 10 years and United Health knocks out counting dividends a 7% compound of return during that time, it's going to be a great thing though. It's multiple is going to rise. You know, I can't resist to buy the dip opportunity. So I had to follow up on the agenda. Well, it's back to where we originally started. So you can imagine what we might be thinking. Okay. That you might add. We'd like to see the insiders though. Helmsley bought. That's what originally got us involved. Okay. Cool. We're running out of time, but I want to get your picks out on the table as well. We know what you think about Adam Waters. Think at this point. Strathcona though. It has really, you know, after failing in its attempt to buy Meg. Did the special dividend, you know, naturally the stock comes under pressure. Yeah. But even then, it has, it has underperformed the broader energy group. Yeah. What's going on? Yeah. Yeah. So they paid out their $10 special. I think the high and the stock was around 42. Mm-hmm. So you think $10 net of that was at 32 then? Yeah. 26 today. So I look at that is it's pulled back to a point where it's like very attractive compared to a lot of things out there. Here's what I would just say. Why is it lacking when everything else is doing well? Well, they just had a lot going on and they'd really re-rated from where they were. I mean, think of how much, you know, don't forget, if you go back to when that came out of Pipestone, you know, that was trading in 20s, low 20s, counting the $10 special. I mean, think about that for a while. Yeah. So as we look forward, it's like, okay, has Adam said everything that he was going to do and been very forthright and direct. I mean, I mean, I remember people like, oh, is he really going to pay a $10 special? Is he just going to lie to us? Well, under securities law, that might be tough, but I don't know. So I say that because he's done exactly what he's told people he's going to do. Now, do I think what they got in their purchase, you know, their related party transaction with Stenovis when they took over that Saskatchewan asset? I think they stole that from Stenovis, but I think Stenovis needed to do something to do that. Yeah, right. So I say that because I think that value is worth a lot. The value that asset they bought was a lot and Saskatchewan. So I think we'll see that, but you're going to see it come to grow production. You know, they're going to tell you that they'll grow production less than $30,000 per falling barrel Canadian to do that. Why are they doing that? Because they trade for $60,000 per falling barrel. But what other executive in Canada looks like Robin Williams? I mean, thanks for that. Yeah, that's true. Okay, we've got just, let's try and do this in two minutes, but a name you have. I don't think have you discussed it yet, West Fraser? Yeah, we own West Fraser. You own West Fraser, a Canadian lumber. Tell me about why are we buying Canadian lumber? So we've actually owned it for a decade. Okay, so back to policy, back to Pills Point on United Health. We love when government gets involved with business because they tend to be bad at business and create opportunities for investors. So you're up if you've owned it for a decade? Correct, we've owned it that time. We're a real sideways trader for years. Well, correct. So we started in the 60s in 2017 back when the softwood lumber dispute ended, tariffs were coming up back then. So you buy a stock in the 60s, it goes to 140-ish at its peak and you wake back up at 96 roughly today. And you think, well, I went from making incredibly good money to making okay money. Okay, now that being said, when does that business great? Two times it can be incredible to be a buyer. One, when supply is coming out of the industry, which is what you're seeing, you're seeing curtailing supply. That's always very bullish because price regulates price or low prices always cause high prices in the future. That's one. Two is if there's one thing that I'm going to get down on my knees and say, dear God, I'm in the lumber business, what's the one thing I really want? Jim Paterson, open market purchase because he did that back during COVID in the depths and depression back then that the housing business was thought to be in. He did that, obviously, in West Fraser Stock in the open market. And so I say that because Jim has been a great counter-cyclical buyer, he's a very old person. Nowadays, when I've heard he's not that active compared to what he used to be, but that's the one thing I really want. It's just a lot of insider buying and Jim would be a great person to do that. And it's very familiar with the fact that I was in Seattle for 40 years. And I used to tell people the two worst performing stocks of my time in the investment business in Seattle were warehousing and Puget Sound Energy. Puget Sound Energy used to run commercials telling people to use less of their products. Gas, natural gas. Yeah. And it's like, why? Well, an electricity also. And then warehousing has the most fabulous farming operation in the practically in the world, right? For trees. They farm trees. Yeah. And all they care about, there's like now probably 120 airs or 160 airs that get fed dividend. They live off the dividends off warehousing. So they run it like, it's only-- It's a trust fund. It's a trust fund stock. And-- So he really had to sell West Fraser to you? Well, no. It makes complete sense. We on the homebuilder. So a lot of this to do with housing. So if housing's in a tough spot, the lumber producers-- That is their swing producer and effect is US homebuilders. Yeah. Yeah. So the point is, if Jim Patterson was running warehouse, we'd probably buy the stock. Maybe. But he's not a young man. There needs to be a mini-jem. Well, you've got a mini-bill over there, but you're still a young man-bill. Thank you so much for your time and your insights. And for having the show in Phoenix, I really appreciate it. Yeah. Thank you so much. That's Bill and Cole Smeade joining me. Don't miss our next episode. Also a value investing episode. We've got Jonathan Wellam of Rocklink, the former money manager for Michael Lee Chin. Don't miss that. And we'll catch you on the next episode. [MUSIC PLAYING]