In a recent interview with Barron’s, Davis Advisors’ chairman and portfolio manager Chris Davis shares valuable insights for investors regarding the current market environment.
Here are some key takeaways:
- The market has suffered intense volatility because of the coronavirus pandemic but has bounced back in a way that doesn’t align with the underlying economic data, Davis says, adding that he and his firm “recognize that the short term is completely unpredictable” but that if you look over the “longer arch of time” you see that the market has steadily marched upward despite these type of intermittent events and disruptions.
- Davis advises investors to “look at your portfolio and be sure you own companies that can get through this period of uncertainty.”
- Volatility can be an investor’s friend, Davis argues: “You make most of your money in a bear market,” he says, “you just don’t realize it at the time.” Lower prices, he says, increase future returns—he uses the example of an apartment building that was purchased for $10 million but amidst tough times loses rental revenue. “The value of the building didn’t decrease, but the price someone is willing to pay goes down. Investors should view stocks like that.”
- “As humans,” Davis notes, “we don’t welcome times of fear and panic. As investors, we welcome the prices that those emotions produce.”
- Market pullbacks are “an inevitable part of the landscape,” says Davis, noting that the market has experienced downturns in about 23% of years. “It’s not all that uncommon. But when it happens, people act like it’s Armageddon, like it’s the end of the world.”
- Davis warns investors to be wary of the following types of businesses:
- Companies with high fixed costs, levered balance sheets and plummeting revenues. These types of businesses, he says, will have to raise capital and will likely have to accept “capricious” terms to do so.
- “Dividend darling” businesses that have long been viewed as safe, that have protected shareholders during past crises and paid dividends every year for 40 to 50 years. Analysis of these companies, Davis argues, would reveal significant increases in debt over the past 5-10 years as well as significant secular challenges and weak balance sheets. “You won’t find Procter & Gamble products at Whole Foods,” says Davis.
- While the Fed’s policies have greatly reduced short term uncertainty, Davis argues that they may have increased long-term uncertainty: “We’re now in uncharted territory regarding debt to GDP.”
- Davis sees opportunities for investors in companies where fundamentals have improved during this period due to changing consumer behaviors, citing online gaming and streaming services as well as online shopping: “Parent’s aren’t going to cancel Disney Plus when the crisis is over,” he quips. The most significantly mispriced companies, according to Davis, are those facing “short-term uncertainty but with little doubt on long-term earning power.” He cites global industrials (including United Technologies) and “high-grade financials” as examples. Regarding the latter, Davis emphasizes that as a direct result of the experience during the financial crisis banks entered this period with 90% more capital, increased liquidity, and tighter regulations and are therefore extremely well-suited to weather the storm.
- Financial advisors, according to Davis, are the best way to add value for clients. He explains that client returns are dependent on both investment results and investor behavior. Financial advisors, he says, add value by managing client behavior, by saving clients from themselves.”
