How one big stock-market investor is positioning for a decade of inflation

With the threat of inflation back at the forefront for many investors, there’s one large stock-market investor positioning for it to be a decade-long phenomenon.

In a note posted to the firm’s website, Chief Investment Officer William Smead of Phoenix-based Smead Capital Management, which oversees $5.83 billion in assets, said “we are loaded with inflation beneficiary stocks like oil and gas stocks and useful real estate.” The firm likes home builder D.R. Horton
DHI,
+0.17%
; Simon Property Group
SPG,
+0.15%,
a real estate investment trust that invests in shopping malls; and energy company APA Corp.
APA,
-0.25%
“as ways to get our share of the profits from a very overvalued stock market,” he wrote.

All three major U.S. stock indexes ended lower on Wednesday, after ISM data showed the services sector expanded for an eighth straight month in August. The report, which reignited worries about inflation, pushed two-, 10- and 30-year Treasury yields
BX:TMUBMUSD10Y
to among the highest levels of this year, and slightly nudged up the market-implied likelihood of another Federal Reserve rate hike by December.

The stock market is currently “priced under the assumption that inflation will abate,” Smead wrote.

“Unfortunately, the government is discouraging fossil fuel production, so get ready for high oil prices for a long time. Throw in labor demanding higher wages and you get both cost-push and demand-pull inflation like what we saw in the 1970s. As inflation becomes a decade-long problem, we believe you will see growth stock price-to-earnings multiples contract over time.”

In addition, Smead said he’s counting on “an inflation-driven home building boom as too many people with too much monetized debt chase too few homes” — or what he sees as “the classic definition of inflation.”

Read: Stock-market investors just got reminded that the inflation fight isn’t over

Smead is lead portfolio manager for the firm’s almost $4.7 billion Smead Value Fund, which invests in large cap U.S. companies like D.R. Horton and Simon Property Group. The fund’s other top holdings include Occidental Petroleum Corp.
OXY,
+1.10%,
Lennar Corp.
LEN,
+0.50%,
Merck & Co.
MRK,
+1.03%,
and American Express Co.
AXP,
+0.41%.