The large-cap value fund has risen 32% this year, better than 85% of its
peers. The fund's top holdings include
Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.
Are you a bull or bear?
We are bulls. The point of maximum pessimism was in early March and was probably a 30-year extreme in pessimism. It will take years to work off the negative sentiment toward stocks. Also, it has been eight years since large-cap, recession-resistant quality stocks were in favor on either a relative or absolute basis. As U.S. households increase their saving and commit some of the massive amounts of cash in low-interest liquid accounts to the stock market, brand-name companies could get a large part of the affection.
What is your top stock pick?
eBay is our top stock pick and the No. 1 position in the Smead Value Fund. We are "bottom up" stock pickers and this one has something for everybody.
First, eBay is a sum-of-the-parts story. They own PayPal, Bill Me Later, StubHub, 28% of Craigslist, 30% of Skype, five of the six largest online classified advertising firms in the world and the greatest online auction business in the world. They're also sitting on $5 billion-plus in cash, with no debt.
Second, it's a growth story. As the years go by and my children become middle-aged, buying and selling online will be as normal as drinking water out of the tap. Imagine all the transactions PayPal will take a small piece of and think about the earnings leverage and free cash flow.
Lastly, as a worldwide brand and a business with no inventory, most investors don't yet recognize the premium that should be placed on their price-to-earnings ratio.
What is your top "under-the-radar" stock pick?
Smead: Legg Mason
. They still have a massive amount of money to manage and a stable of terrific money managers including Bill Miller, Richie Freeman, Chuck Royce, Hersh Cohen, Joe Deane and John Goode. As individuals return to the stock market during the next five years, Legg Mason will get their fair share of new money and will have grown their assets through investment success. As money managers ourselves, we understand the earnings leverage.
If the stock market doesn't recognize them with a higher stock price, they could become a takeover target for a larger firm looking to strengthen itself.
What is your favorite sector?
Our favorite sector and largest overweighting is in drug stocks. As people in developed nations age and the emerging nations begin to provide health care, demand for pharmaceutical products will grow immensely. Barriers to entry are huge and this sector still trades at low P/Es on an absolute basis compared to the last 25 years. We like to buy bright futures at value prices.
What sector or stock would you avoid?
Our least favorite place to be is anything having to do with the BRIC trade. Oil, gold, commodities, basic materials and emerging markets. They have had the upper hand for six to seven years, and that is a long time to be popular. We think they will be dead money during the next three years. We believe the U.S. economy is going to make a better and more long-lasting comeback than analysts expect.
-- Reported by Gregg Greenberg in New York
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.