Chris Davis’ Davis Opportunity – GuruFocus.com
The Fund has thrived due to its dependence on the resilience and strength of earnings fundamentals, represented by holdings in financial services, technology, communication services, industrials and healthcare companies. health.
For the year ended December 31, 2021, the Davis Opportunity Fund returned 24.96%, reflecting real progress in underlying business fundamentals across most of our holdings.
The Fund is positioned to take advantage of business opportunities that span a wide range of industries. Financial services, technology, communication services, industrials and healthcare companies make up the vast majority of our holdings and the largest aggregate percentages.
Within financial services, we have focused on the resilience and solidity of the fundamentals of our holdings. These companies, comprised primarily of well-capitalized banks (in the U.S. and some foreign jurisdictions), have sustainable economies, according to our research and analysis, in terms of demonstrated current earning power, margin structures, and future prospects. .
The absolute level of income and profits generated by these companies is indeed so high that most of the large financial holding companies in their portfolio produce enough operating result individually that a certain number of them could, in theory, buy several entire companies from hundreds of choices within the S&P 1500 Index, using only one year’s cash income without drawing on capital. This is moot, as financial companies would not be in the business of buying healthcare or technology companies, for example, but we highlight these facts to illustrate the sheer magnitude of the economy produced by such companies. individual financials in a given year, which is often a multiple of the cash revenues generated by companies in a host of other industries.
Given this cash-generating power, we are naturally drawn to what we believe to be strong, profitable financial institutions when the price is right. At present, we believe that the valuations of our financial holdings are not only reasonable, but also extremely attractive, and the composition of our portfolio reflects this view. Representative financial holdings of the Fund include Wells Fargo (WFC, Financial) and Capital One Financial (COF, Financial).
Healthcare is included in the portfolio for both company-specific reasons and general trends. At the company level, we hold selected companies in the pharmaceutical, healthcare services and health insurance sectors at attractive valuations. This is at a time when the average age of the US population is rapidly approaching 40, older than Asia-Pacific and somewhat younger than older populations in Europe and Japan. The number of elderly people in the United States, that is, those aged 65 or over, now exceeds 54 million, or about 15% of the population. Older people, on average, take a much higher number of medications and account for a disproportionately large share of healthcare spending, and we expect this trend to continue due to both raw demographics and a proliferation in the number of treatments and services currently available, the latter being driven by innovation and investment in the health sector. Representative Fund holdings include Cigna (CI, Financial), United Health Group (A H, financial), Viatris (TRV, Financial) and Quest Diagnostics (DGX, Financial).
The portfolio is complemented by a number of other industries whose common thread is the attractiveness of individual companies.
In the short term, investors face a dual challenge: COVID and inflation. But we believe they can be overcome by the resilience of the US economy.
The future cannot be accurately predicted, but we operate on a few working assumptions:
First, we believe that COVID in its various iterations will be progressively addressed by methods and treatments already available or in research and development. Never in modern history have the private and public sectors around the world been so focused on solving a common problem. Perhaps the closest analog in terms of expenditure and investment, as well as coordinated efforts, would be a major war. This does not ensure the eradication of the pandemic, but it does mean that from this starting point, where we are at the heart of the ordeal, the future is likely to be brighter as the health challenge s is attenuated. This would likely bode well for a multitude of industries, many of which are represented on the Fund today.
Secondly, with regard to inflationary pressures, we believe that they are unavoidable for some time, but the inflationary trend may moderate, with supply easing and logistical bottlenecks being an under -product of the pandemic. Furthermore, we believe that inflation does not only affect companies’ general ledger liabilities and expenses, but also revenues and revenues, provided that companies have the competitive position and influence to increase the prices. In nominal terms, if revenues and profits can grow at a rate commensurate with upward cost pressures, there is no reason to assume that operating margins will necessarily be permanently compressed and reduced. We will be watching this closely, but believe the odds favor increased economic productivity in the face of rising costs, especially if supply chain issues begin to ease and economic activity can fully resume.
Finally, we note the strong and healthy credit situation and balance sheets of U.S. businesses and U.S. households as a whole, which means that any improvement in economic conditions need not be spent on repairing capital positions. , as was necessary in the aftermath of the 2008-2009 crisis. financial crisis. Earnings growth could therefore well be largely additive on an incremental basis, if revenues increase alongside a partial or full resolution of the pandemic over time. Again, many of our businesses are significantly undervalued against this setup.
The Fund aims to provide tangible value to investors, protected by diversification.
Context and having a well-grounded outlook on the big picture is important, as it can point to multi-year tidal trends benefiting groups of companies. We follow this rule of thumb and pay close attention to the strengths of the big picture.
Ultimately, however, investing in specific companies is where we believe we can add the most value for our shareholders. Sometimes the levers that management can activate within their respective companies are not apparent to the market, as they involve multi-year efforts that may not bear obvious fruit in the short term. This means that investing in growth and reducing both the expense structure and the number of shares (at advantageous valuations) can create value, although the response and appreciation of the general investor population may sometimes be delayed.
From a multi-year, multi-decade perspective, we are confident that our portfolio is built to last at the level of each company. Additionally, we would believe that the Fund is sufficiently diversified to capture a range of possible outcomes in the future, as well as to mitigate the risk of putting all your eggs in one basket. And finally, our observations suggest that the overall environment – particularly related to the impact of COVID – may well be on the verge of improving from here, looking to the medium-term future.
At Davis Advisors, we seek to buy sustainable businesses at bargain prices and retain them for the long term. The Davis family, its foundation, our company, and our employees and directors have invested more than $2 billion alongside clients in similarly managed portfolios, demonstrating our commitment and alignment with shareholders.1
We are grateful for your trust and look forward to continuing our investment journey together.