YouTube/Chris Davis/Bloomberg
- Chris Davis, portfolio manager at Davis Advisors, made over $1 billion for his clients through a well-timed energy trade backed up by hard data.
- Today, he's only investing in his most high-conviction ideas as "fewer and fewer" businesses meet his stringent investment criteria.
- Davis outlines three top stock picks that he's bought up in the midst of the coronavirus-driven market turmoil.
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Chris Davis, portfolio manager at Davis Advisors, knows a thing or two about picking stocks. In fact, he estimates that he made his investors over $1 billion dollars on a single energy trade rooted in sound analysis and near-perfect execution.
The trade was simple: Davis loaded up on shares of EOG Resources, a hydrocarbon-exploration firm that became independent from former parent Enron in 1999. He started buying in the early 2000s because he liked the company's reserves-per-share growth, "enormous" capital discipline, and return-on-capital disipline.
The rest played out perfectly. The stock soared 211% in 2000 alone.
Today, Davis is seeing juicy opportunities present themselves in the wake of the coronavirus-driven stock selloff - but he's only deploying his capital in his most high conviction ideas.
"Although we've been in a world where the averages have done great in terms of stock performance, when you look through at the underlying businesses, we're seeing fewer and fewer businesses that have the combination of characteristics that we love," he said on "The Long View" podcast.
Those characteristics are: Strong balance sheets, a period of de-leveraging, earnings growth, solid returns on capital, and wise capital allocation discipline - and frankly, he's not seeing a ton of companies that fit the bill.
Davis' religious adherence to this criteria results in a rejection of nearly nine out of 10 stocks within the S&P 500. But that doesn't mean he's underperforming. Far from it.
"And yet, if you looked at the five-year growth of our companies in EPS [earnings-per-share] it's been like 20% or 21%, versus 17% for the S&P," he said. "So they've grown faster, and yet, they trade at a 25% discounted PE [price-to-earnings ratio]. We think that ability to be selective - and define those few companies where you have this durable growth and are undervalued - that's the sweet spot."
It's important to note that Davis isn't trying to pinpoint an exact turnaround for his picks, however, he sees the "period of uncertainty" stemming from the coronavirus coming to a close in a relatively short period of time. Ergo, he's investing in this market under the overhang that these effects may linger for 12 to 18 months.
To that end, Davis has been building an extra margin of safety into his picks, and only scooping up shares of businesses he characterizes as incredibly durable and extremely well prepared.
Let's take a closer look. All quotes are attributable to Davis.
1. United Technologies (UTX)
"By far our biggest buy in this period was buying United Technologies," he said. "We could not understand what the hell that thing was doing going down 30, 40, 45%. It has a strong balance sheet, great management, was on the cusp of splitting into three businesses, which just happened last Friday."
Davis notes that a slew of powerhouse companies (prior to the split) including: Raytheon, Pratt & Whitney, Otis, and Carrier are "enormously durable" and have stranglehold on their respective markets.
"You have, in a way, a portfolio of super high-grade industrial companies with a strong balance sheet - and the uncertainty about was going to happen in the next year somehow drove that stock down 40% or so," he said. "So down way more than the market with way better businesses, with high returns on equity, huge durability. So that was a big buy for us."
He concluded: "That was an easy, big add."
2. Wells Fargo (WFC)
"They've been in the penalty box for 2, 3 years now," Davis said. "They've changed out the senior management. They've changed out the majority of the board."
He continued: "But what happened was, it came into this crisis cheap because of all this reputational damage."
"Somehow in this period, it went down way more than the average bank - and that seemed crazy to us," he said. "They have high capital ratios; they have incredible franchises; they've had a long history of a very strong credit-culture; they've had the asset caps that have kept their leverage down; they have relatively low dividend payout ratios."
"I think Wells is the cheapest of the big banks, given the quality of the franchise. And as I've said, if Wells' ends up to just be average, you're still going to make money as the valuation improves from below-average to average."
3. Capital One (COF)
"Capital One and Wells have been our biggest buys, but generally within the broader theme of the idea that banks have gone into this crisis incredibly well-prepared," Davis said.
"Capital One is the only major bank in the US - as far as I know - that is still run by the founder," he added. "Capital One is still being run by Rich Fairbanks, who, I think has been one of the greatest entrepreneurs, and innovators, and executives in financial services."
Davis continued: "Capital One was created essentially as a technology company, because they said: 'We're going to basically create a company that using data will market credit card offers to people - and we'll build a business without ever having branches or brand name.'"
"It is a very technologically, data-driven bank," he said.
"Again, the fear of the financial crisis ... fear of subprime, drove that stock - where the average bank was down 30, 40% - it was down 50, 55%. And we just thought that that was terrific."
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