Invest in millennials and these once-in-a-lifetime-opportunity stocks, says this fund manager

Those ideas come from Phoenix-based Smead Capital Management, which has laid out its assessment of where things stand in a new investor letter. The year has been tough for value managers like Smead, whose value fund SVFAX is up about 2% on a year-to-date basis as of Sept. 30, but up an annualized 16.7% over three years.

Lead portfolio manager Bill Smead and his son, co-portfolio manager Cole Smead, think this year will end up in the history books for a mania/bubble over Magnificent Seven tech stocks and AI.

And while that will “end badly,” they see some of the capital tied up in that making its way “into whatever investors gravitate toward in the future.”

They believe the market is in the “early stages of a commodity supercycle,” with a “once-in-a-lifetime opportunity in oil and gas shares.” Those stocks have “dramatically underperformed the price of oil this year and have created what we believe is an excellent short-term buying opportunity of the industry,” they say.

Here’s their chart showing where the current supercycle is tracking:

They highlight stocks such as Occidental Petroleum
OXY,
+0.02%
and ConocoPhillips
COP,
+0.55%,
up 0.7% and 4.6% so far this year, and held in their value fund.

The second call from the Smead managers looks to cash in on the “upcoming dominance” of the social-media generation — the millennials who represent a hefty and biggest 72.24 million chunk of the population as of 2022.

“The inverted yield curve and the Fed tightening are scaring people away from economically sensitive businesses that should benefit the most from the fact there are 40% more millennials in the 27-42 year-old age group than the Gen Xers who preceded them.

“Any economic contraction that would bring interest rates down would kick in strong economic activity from this powerhouse population group,” say the Smead managers.

And while the housing market is tough for both buyers and sellers right now, thanks to high interest rates, the managers are betting on home builders, financial institutions and retail-oriented companies to “feed off the millennial move to the suburbs.”

Their picks include: D.R. Horton
DHI,
+1.32%,
which is down 2.7% this year, American Express
AXP,
+0.23%,
up 2.4% and U-Haul
UHAL,
+1.28%,
unchanged this year. If that call is right, then indeed it may be a cheap time to pick up those millennial bets.

“This era is providing us the opportunity to own high return-on-equity companies trading at very depressed prices relative to the average stock and at a huge discount to the shares dominating the S&P 500 index,” say Smead.

The markets

Major stock indexes
SPX

DJIA

COMP
are lower after that retail sales data, with Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
headed for 16-year highs. Oil
CL.1,
+0.13%
is edging higher. Bitcoin
BTCUSD,
+0.76%
is trading atop $28,000 — one analyst sees $45,000 likely once the SEC approves an ETF.

Read: What Israel-Hamas war means for gold as investors seek safety

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The buzz

Retail sales rose 0.7%, stronger than the 0.3% gain that was expected for September. Industrial production also rose 0.3%, higher than expected, while a home builders confidence hit the lowest level since January.

Read: Fannie Mae’s CEO says home buyers, owners both trapped by high rates

Bank of America
BAC,
+1.74%
and Bank of New York Mellon
BK,
+2.41%
are up on earnings beats, and Goldman Sachs
GS,
-0.88%
beat Wall Street’s pared estimates, but shares are flat. Johnson & Johnson stock
JNJ,
-0.61%
is climbing after beating forecasts and lifting guidance. And analysts are upbeat ahead of Netflix’s
NFLX,
-0.88%
earnings on Wednesday.

Check out MarketWatch’s live earnings coverage here.

Tupperware shares
TUP,
+8.42%
are rallying on news CEO Miguel Fernandez is being replaced after just over 3 years on the job.

Iran’s foreign minister has warned of “pre-emptive action” against Israel in the coming hours over its bombardment of Gaza. President Joe Biden heads to Israel and Jordan on Wednesday to meet Israeli and Arab leaders as concerns grow of an expanding conflict.

A House speaker vote is coming at noon, with Ohio Rep. Jim Jordan stacking up the votes.

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The chart

Deutsche Bank has determined what it says are the five weakest links in the global economy.

No. 1 is data cables: “As much as 99% of international digital communications – and $10 trillion of financial transactions a day — pass through fibre optic cables draped on the sea bed. There are about 550 active and planned cables stretching
1.4 [million kilometers]. Many are barely thicker than a garden hose,” says a team led by strategist Adrian Cox, who adds that they “have limited bandwidth and can be interrupted.”

The other four weak links? Roads, rivers and rails, sea straits, sky corridors and satellites.

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

Random reads

Goldman Sachs CEO David Solomon exits the DJ business, at least for public events.

Barbie is the Halloween queen.

Missing: A $3.6 million statue in Glasgow.

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