Actively managed financial stock funds may be the best-kept secret on Wall Street, according to Chris Davis, portfolio manager of Davis Financial Fund.
An industry veteran with over 30 years of experience successfully managing financial-stock portfolios, Davis shared his thoughts on why this may be the best time ever to invest in them.
“Given today’s low prices, we believe select financials will generate strong returns over the next decade because they combine what we feel are durable business models, the strongest balance sheets in half a century, resilient earnings, good returns on equity, the potential for rising dividends, falling share counts, and low valuations,” he said in a recent newsletter.
Davis said that financial stocks fell out of favor with investors after the 2008 financial crisis. However, he said, his group’s research showed that certain high-quality financial companies remained profitable during the worst financial crisis since the Great Depression, and are currently trading at close to a 30% discount to the market.
“Because of limited competition and extremely tight credit standards, these businesses have record earnings,” he said.
As a result, some financial companies are in a position to distribute an increasing percentage of their earnings.
Davis said that in the event that interest rates should rise as a function of strong economic growth, select financials may be net beneficiaries as net interest margins expand.
He said a strong case could be made that the right financial company is by its nature a long-term cash-compounding machine since most people patronize at least one, two or three financial companies to get the best rate for their needs.
“In brief, financial companies offer products that generally do not become obsolete,” Davis said.
Davis said there were three scenarios under which financial stocks could perform well, even in a low-growth environment, as many currently believe is the case.