Long-time Financial Sector Investor Chris Davis on Identifying the Best Opportunities

Chris Davis of The Davis Advisors, who currently manages the $14.3 billion Davis New York Venture founded by his father, thinks opportunities to invest in the financial sector are as good today as they were when he launched the Davis Financial Fund in 1991. That fund ended 2014 up 13% and is currently beating 64% of its peers. “We’re in a very similar environment” regarding financial companies as in the early 1990s, he said in a recent Barron’s interview, noting “they’re trading at as wide a discount to the S&P as they’ve traded in the past 20 or 30 years.” He maintains that “if and when interest rates go up, [financial companies’] earnings will go up sharply.”

Davis identifies financial company stocks to invest in based, in part, on “culture.” “By accounting choices, reserve practices, past credit losses, and disclosure practices,” he explained, you can build a pretty good mosaic about the culture of an organization.” He noted that business plans and similar indicators may not reflect culture, using U.S. Bank and Wells Fargo to illustrate his point. He pointed to Jamie Dimon, CEO of JP Morgan, and the company’s handling of the London Whale crisis as an example demonstrating the “transparency, integrity, and relentless focus” that characterizes the type of company culture he seeks to invest in.

Regarding financial sector stocks, Davis observed that although they are often discussed as a group, there are meaningful subcategories. “There are financials where scale is a huge advantage. There are financials where brand is a huge advantage. There are financials where capital allocation is the key advantage, and then there are companies where their global footprint is a huge advantage.”