Cole Smead, CEO & Portfolio Manager, Smead Capital Management
Focus: Canadian & Global Stocks
Top Picks: International Petroleum, Barclays, Autotrader
MARKET OUTLOOK:
We remain convinced that the deeply out-of-consensus corners of the market, namely banks and energy, still have room to run, even after three years of leadership. The more interesting question isn’t whether these stocks have worked. It’s where they stand relative to where we bought them.
Take Cenovus. We bought into Husky Energy in December 2020 as it merged with Cenovus, when the combined company traded at roughly 40 per cent of invested capital. Back then, we needed to believe returns on capital could reach 10 per cent just to justify one time invested capital. Today, Cenovus trades near two times invested capital, and at current oil prices we estimate it’s producing closer to 30 per cent returns on capital. Returns could fall 40 per cent from here and the stock would still support that multiple. That’s a margin of safety the market still doesn’t appreciate.
We see the same dynamic in European banking. UniCredit traded below half of book value in 2022 as a high single-digit return of equity (ROE) business. Higher rates turned it into a mid-teens ROE business, and it now trades at a premium to book. We expect its purchase of Commerzbank to close, with further consolidation likely in Greece and Italy. Scale drives returns in capital-intensive industries, and the market is only beginning to price that in.
Our advice to investors: don’t confuse a stock’s three-year run with the end of its story. We’d rather be patient with what Mr. Market still doesn’t understand than chase what he already does.
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TOP PICKS:
International Petroleum (IPCO TSX)
Barclays (BARC LON)
Autotrader (AUTO LON)
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| IPCO TSX | Y | Y | Y |
| BARC LON | Y | Y | Y |
| AUTO LON | Y | Y | Y |
