Tech investors could face brutal losses if regulators dismantle the companies and tax them more effectively, Smead said.
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October 16, 2020 2 min read
This story originally appeared on Business Insider
Growth stocks may be a “disaster waiting to happen,” the heads of Smead Capital Management warned in their third-quarter newsletter this week.
Amazon, Facebook, Apple, and Google have monopoly power over their addicted users, Bill Smead and his co-portfolio managers, Tony Scherrer and Cole Smead, told their shareholders. Offering services such as YouTube and Instagram for free means rivals can’t compete with them on price, they continued.
The coronavirus pandemic has only strengthened their position by putting their userbase in a “state of near-complete dependence,” they added. Millions of people, scared or unable to leave their homes, are relying more on their devices and apps to stay connected, productive, and entertained.
However, shareholders in the US technology titans could suffer heavy losses when regulators drop the hammer, the trio said.
They pointed to Amazon’s profits from its cloud-computing division, which enable it to cut prices in its core e-commerce business and kill competitors. Its sky-high valuation could be “obliterated” if the two segments are separated and the company is lumped with a massive tax bill, they said.
Smead and his team managed $1.6 billion in assets as of September 30. Their flagship portfolio has returned an average of 10% over the past 12 years, but was down 9.5% for the year at the end of the third quarter.
The trio are betting on companies that provide tangible necessities such as pharmaceuticals, oil and gas, houses, and storage. Their biggest holdings include Target, homebuilders Lennar and NVR, biopharmaceuticals giant Amgen, and American Express.
“Value has beaten growth by over 3% per year for 94 years and is the most depressed it has been in 57 years,” they said in the letter. “We look forward to the next five years as we believe the remedies will play out.”
Cole Smead echoed his team’s comments in a CNBC interview this week, arguing the market has ballooned to unfounded, unsustainable levels. US stocks have become a “total nightmare” driven by “young and dumb investors,” he said.