Chris Davis, chairman of the value investing shop, Davis Advisors, and portfolio manager of multiple Davis funds including the Davis Financial Fund, talks about a wide range of investing topics with WealthTrack’s Consuelo Mack. One of the key points he makes early in the interview is that financial firms with the right culture and the right business can be “compounding machines” over many years or decades. Many financials are growth stocks disguised as a value stocks, says Davis.
Davis explains there is a secular opportunity in financials, because of their long term growth prospects, but a cyclical opportunity exists as well because of the negativity surrounding financials as a result of the financial crisis. This is somewhat similar to the early 1990s, after the S&L crisis. Many financials are trading at their lowest relative valuations in decades, providing investors with an excellent opportunity. He calls it a “cyclical and sector” opportunity in financials.
When asked about how financial stocks and companies fared during the financial crisis, Davis explains that while the stocks of companies like JP Morgan and Wells Fargo went down, the businesses actually got stronger. Using the two banks as examples, Davis discusses how those banks never lost money on an annual basis, and how they took advantage of the downturn by buying assets of other banks and improving their earnings power. His main point is that while the stocks were extremely volatile, the underlying businesses of these financial firms were in fact healthy and strengthening.
Investors who are buying financial indexes and ETFs may be in a dangerous position because those investing products market cap weight holdings and there is no discrimination on quality. Davis says that his goal is to buy above average businesses at below average prices Many investors don’t think of financial companies being above average, but companies like Wells Fargo, he says, have decades of producing returns on equity higher than the market.
When asked about Davis’ exposure to some technology stocks, including Amazon and Alphabet, he explains that when looking at these firms he stays true to a value discipline, but they also tries to value the growth of a firm. A growing company with increasing profits is a more valuable business over time. Davis explains that marrying value with understanding, and valuing growth, and the future cash flows are reasons why some of the Davis funds hold these types of stocks. He uses Wal-Mart as an example, which he says was generating very little positive cash flow decades ago when it was spending on expansion and building stores out, but that the future value of the profitability was key to understanding why Wal-Mart was a good investment.
When asked about the one stock investors should own, Davis says that should be Warren Buffett’s Berkshire Hathaway. Berkshire, says Davis, is like a “super index” but also says that it’s somewhat concentrated and even at times uncorrelated to other equities because the of variation of public and private holdings it has held over time. Berkshire looks attractive at the current valuation, concludes Davis.