David Trainer and Bill Smead discuss two stocks they want to buy: Target and Lear. They focus on cash flows and valuation, using models tied to how much executives are paid.
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With the S&P at a record closing high, which stocks still have room to run? Joining us now with some specific stock picks, Bill Smead, CEO of Smead Management— Capital Management, excuse me— and David Trainer, CEO of New Constructs.
David Trainer, you have short-term picks, long-term picks. Let me look long-term here. You're betting on the consumer. You like Target here, right?
We like Target. It's actually going to be part of one of our special model portfolios that focuses on executive compensation plans that are linked to return on invested capital. And we've seen this really play out well for Target. The return on capital has steadily increased. Profits have steadily grown while the valuation implies that profits are going to permanently decline by 20%. So I like to pick stocks that are good no matter what the macro environment, because it's really hard to predict the macro. But what you can focus on is where cash flows are strong and valuations are cheap. That's good risk reward. And we think Target does a great job of providing that to investors.
David, just to follow up on that, your other— another of your picks is Lear, which is the auto components maker. And what's interesting to me, in fact, about both Target and Lear is that if you just looked at the stock charts, you'd say, wow, U.S. consumer and the auto industry must be in some pretty rough shape. They've obviously underperformed for a while. So implicitly, are you betting, though, that in fact the market has it wrong on that and it's a little bit better fundamentally than it looks?
You know, I'm not a big fan of technical analysis, and what the past price performance of the stock has done doesn't necessarily, for me, matter in terms of the future performance of the stock. But I think it's always smart to buy stocks when they're cheap, when they've been going down for non-fundamental reasons. I think that's a good time to get in. Now, does that mean they're not going to go down more? Yeah, but, you know, the Market Timers Hall of Fame has got nobody in it. So we focus on situations where, like with Lear and Target, Cash flows have been strong and growing, and the valuation at Lear implies a permanent 30% decline in profits.
All right, guys, we'd love to talk more. We had planned to talk more, but we have breaking news that we're going to get to in a minute here. But Bill Smead from Smead Capital Management, David Trainer from New Constructs, thank you for joining us.
