Value investor Chris Davis cut all but two of his bank holdings

Renowned value investor Chris Davis leads Davis Selected Advisorsa hedge fund with $19.9 billion in assets under management.

While there are many value investors I admire, Davis is among my favorites. He is the grandson of one of the greats of the market, Shelby Davis, who turned a $50,000 stake into a $900 million fortune.

The heir to that investment tradition they seek sustainable, well-managed businesses trading at a discount to their intrinsic value. Then it keeps them long term. The average holding period for shares in Davis Select Advisors is between five and seven years. He will only sell a stock if it achieves excessive valuations, exhibits declining fundamentals, or there is a negative change in the management team or its strategy.

There are more than 100 stocks in its portfolio, but a good percentage of them are financial stocks, including Capital One Financial (NYSE:COF), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC). In the second quarter, Davis reduced its position in every bank stock except two. For them, he added more shares to his holdings. Let’s see why they deserved more love than their peers.

Key points about this article:

• Chris Davis drives Davis Selected Advisors hedge fund and comes from a family renowned for its tradition of value investing.
• A significant percentage of Davis’ portfolio is made up of bank stocks, but he added to his position in only two of them, while reducing all others.
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PNC Financial Services Group (PNC)

PNC bank headquarters

The first bank Davis bought more from was PNC Financial Services Group (NYSE:PNC), a regional bank located primarily in the East and Midwest. It has dramatically increased its size over the years through acquisitions, most recently in 2021 when it acquired Banco Bilbao Vizcaya Argentaria (NYSE:BBVA) US banking business.

PNC has proven adept at integrating the commercial and retail banking operations of its targets and is a strong regional bank that was never in danger during last year’s financial market crisis that brought down Silicon Valley Bank and Signature Bank and saw First Republic acquired. of JPMorgan Chase (NYSE:JPM).

However, by acquiring BBVA, PNC sets itself apart from many of its peers in the regional banking sector. It has a larger national footprint and could see better-than-expected tax growth in the coming years.

Davis owns $79 million worth of PNC stock, or about 510,000 shares after adding another 11,000 shares to his holdings. He bought them at an average price of about $158.50 per share, giving him a 15% gain on the new tranche. Since his average purchase price is $113 per share, he has a nice 62% gain year to date.

Since he’s been adding to his holdings, he apparently doesn’t see PNC Financial as being at an extreme valuation.

US Bancorp (USB)

US Bancorp’s American Bank Building

The other bank Davis added to was US Bancorp (NYSE:USB), another regional banking giant. There was some concern about the bank during last year’s crisis and it saw some customers flee with their deposits, but it was short-lived. US Bancorp is in a much better position today.

Part of the concern was acquiring it Mitsubishi UFJ Financial GroupUnion Bank’s (NYSE:MUFG) at the end of 2022. While the acquisition was a bit poorly timed given the industry turmoil that followed shortly thereafter, US Bancorp has seen a significant improvement in its stock common Tier 1, or CET1.

The CET1 ratio measures a bank’s capital to its assets, with a higher percentage being better. US Bancorp’s rate fell from 9.7% to 8.4% after the acquisition, but has been steadily rebuilt. to the end of the second trimesterUSB’s CET1 ratio was 10.3%, an improvement from the 10% it had at the close of the first quarter.

Davis owns 14.2 million US Bancorp shares, valued at $565 million. That makes it one of the top 10 holdings of billionaire investors. He only added 43,000 additional shares at about $42 per share. With USB trading around $45 per stub, he has a small gain on the tranche, although his total buy-in is just under $46 per share, so it’s basically break-even at this point.

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