The firm offers a variety of investment vehicles, ranging from real estate funds to the Davis Value Portfolio. Its goal is “to provide investors access to attractive investment opportunities in large-cap, durable, well managed businesses.” Christopher C. Davis always says, “Despite periods of uncertainty, stocks permanently reward patient, long-term investors.”
The Davis process starts with two primary questions:
1. What kind of businesses do we want to own?
2. How much should we pay for them?
Davis Advisors constantly seeks businesses with proven leadership, successful operational models, and sustainable competitive advantages. Another issue is whether the firm can generate free cash flow consistently, earn high levels of return on capital, and can produce products not susceptible to becoming obsolescence. The final test of a prospective investment is whether the firm can maintain its dominance in a market due to a combination of brand power, market share, effective supply chain, and numerous qualitative factors.
If the investment opportunity passes these tests, further due diligence is conducted to determine the value of the firm.
“Our goal is to purchase durable, well-managed businesses when they are trading at a discount to our estimate of intrinsic value in order to establish a margin of safety, which can enhance prospective returns while reducing investment risk,” Davis added.
Davis Advisors utilizes four financial metrics in their analysis:
- Owner Earnings: the excess of cash a business generates after reinvesting to maintain capacity but before reinvesting for growth.
- Enterprise Value: the price to be paid.
- Owner Earnings Yield: once the enterprise value is calculated, owner earnings is divided by enterprise value to yield a calculated return that the firm would earn if they were to purchase the business immediately.
- Reinvestment Rates: assumptions are utilized based on future estimated returns on capital.
As regards financial results, Davis Advisors returned portfolio returned 31.16% and 12.76% in 2009 and 2010 respectively. Comparatively speaking, the benchmark returned 26.5% and 15.1% for the same period. In 2007 and the 2008, the firm underperformed the benchmark by 8.6% and 10.9%. Since its inception, the value portfolio had an average annual return of 3.14%.
The firm is in a good shape to face future outcomes. Davis Advisors acknowledges an overall improvement in earnings, cash flow, liquidity, balance sheet strength, and dividend growth.
I found some very attractive low P/E "seed research" opportunities from his portfolio:
Banco Santander Brasil SA/Brazil (BSBR):
Banco Santander Brazil is the third-largest non-government-controlled bank in Brazil. Commercial loans constitute about 70% of its $100 billion loan book, and credits for individuals make up the rest. Traditional commercial banking provides about four fifths of the company's core earnings, while global banking is responsible for 15%; asset management and insurance make up the balance.
With Grupo Santander's global network behind it, Santander Brazil can attract businesses that want to expand beyond Brazil. The Brazil branch has plenty of capital to deploy in its expansion plans without needing to raise any new equity to support its growth. BSBR offer quality growth that came from a Brazilian economy that expands year after year and a solid credit environment.
Davis kept his position unchanged from last quarter.
Hewlett-Packard Co. (HPQ):
Hewlett-Packard provides a variety of services and products ranging from software to IT consultancy to their clients. HPQ currently trades at $35.30, with a market capitalization of $73.22 billion. In 2011 it grew revenue 1%, non-GAAP EPS 7% and free cash flow 8%. Moreover, it generated $12.6 billion of cash flow from operations. HP's global reach and well-run logistics provide an efficient platform to assimilate and distribute new technologies. HP is effectively targeting technologies to acquire in storage and networking that will help it build an all-in-one portfolio for enterprise data centers. The EDS acquisition instantly positioned HP to be a contender in enterprise services.
HPQ has a very low P/E and a solid brand. I think this is the most cheap big cap tech stock and a solid opportunity for the long term investor.
BP Plc (BP):
BP Plc is the holding company of one of the world's largest petroleum and petrochemicals groups. Their main activities are exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and manufacturing and marketing of petrochemicals. They have a growing activity in gas and power and in solar power generation.
The company operates in Europe, North and South America, Australasia and Africa.
The company expects to complete its asset sales by the first quarter of 2012 and plans for an additional $15 billion in divestments before 2014. The company is offloading its non-core upstream properties while creating a portfolio with potentially stronger growth from a smaller base. Its new strategy of active portfolio management, higher exploration activity with additional precautionary actions as well as refining and marketing repositioning is expected to create value for shareholders.
Davis kept adding to his position since BP traded in the mid $30s.
Brandywine Realty Trust (BDN): Brandywine Realty Trust is a real estate investment trust. The firm owns mostly office buildings in suburban locations, but it also owns some industrial and mixed-use facilities.
Tenants sign long-term leases that include regular rent payments, a share of operating expenses and real estate taxes, and annual rent bumps. Over the long term, this should result in a nice stream of recurring revenue for Brandywine. These leases generally provide reasonable protection against inflation as tenants are generally responsible for reimbursement of real estate taxes.
BDN offer a good opportunity for investors that believe in a U.S. real estate recovery.
JPMorgan Chase & Co. (JPM):
JPMorgan Chase & Co. is a leading global financial services firm. The firm is a leader in investment banking, asset management, private banking, private equity, custody and transaction services and retail and middle market financial services.
JPMorgan is in sound financial health. The firm posted a Tier 1 common capital ratio of 9.9% as of September 30, 2011. Its allowance for loan losses totaled 4.09% of retained loans as of the same date. In addition, JPMorgan Chase achieved a reasonable level of profitability in recent quarters, despite a number of headwinds. JPMorgan Chase did a remarkable job limiting its losses during the financial crisis.
The bank's performance under current leadership should give investors confidence in the firm's risk management practices, despite the complexity of the business.