Davis Selected Advisors Buys Merrill Lynch Stake
Kurt Brouwer December 26th, 2007
Lately, there has been a string of announcements about financial services companies bolstering their capital. In the latest move, Merrill Lynch announced the sale of $6.2 billion in stock to two investors, one of which was Davis Selected Advisers, portfolio manager of Selected American Shares, Clipper Fund, New York Venture Fund and others. This is an interesting move. Portfolio managers Chris Davis and Ken Feinberg typically have a big stake in financial companies and they know them well. In addition, they have a penchant for buying into ‘fallen’ angels — solid companies with excellent franchises that have fallen on what Feinberg and Davis believe are temporary hard times. This investment fits both situations as the article points out [emphasis added]:
Merrill May Take More Steps To Fix Finances (Wall Street Journal, December 26, 2007, Randall Smith & Jason Leow)
‘The $6.2 billion sale of stock by Merrill Lynch & Co. at a 12% discount to last week’s market price shows both the severity of write-downs still facing the Wall Street brokerage and the determination of its new chief executive, John Thain, to act quickly to settle its finances.
Merrill unveiled deals Monday to sell stock at $48 a share to a Singapore government investment fund and a U.S. mutual-fund company. Merrill’s stock closed Thursday at $54.50, before news of talks about the investment was reported in The Wall Street Journal…
…Davis Funds’ Strategy
Regarding the other deal, Kenneth Charles Feinberg, a portfolio manager at Davis Selected Advisers LP, which manages about $100 billion, including the well-known Clipper Fund, said Davis funds “place an enormous amount of emphasis” on a company’s chief executive in choosing stocks, and it valued Mr. Thain’s track record at New York Stock Exchange parent NYSE Euronext and Goldman Sachs Group Inc. in its decision to pay $1.2 billion for 25 million Merrill shares.
Mr. Feinberg co-manages most of the Davis funds’ assets with Christopher Davis, son of company founder Shelby Davis.
A heavy weighting in financial-services stocks, including holdings in Citigroup Inc., Morgan Stanley and E*Trade Financial Corp., has hurt Davis’s performance this year, but its largest fund, the $50 billion Davis New York Venture Fund, has returned 10.5% on average for the past three years and 14.5% over the past five years, outpacing the return for the Standard & Poor’s 500-stock index in each period…’
It takes a bit of nerve to make a deal like this when financial stocks are struggling so I applaud Davis Selected Advisers for stepping up. We do not know whether or not this particular deal will pan out, but buying a stake in brand-name companies when they are struggling is a strategy that has generally worked well over time. And, this is not the only example of value investors buying financial stocks as we pointed out in a recent post, Bill Miller of Legg Mason Value Trust: Buy Battered Financial & Housing Stock.
Value investors are often a bit early when they buy into fallen angels because their focus is on finding bargains, not timing the market. However, in my opinion that is what it takes to get bargains because it is difficult, if not impossible, to pick the absolute low point in a stock.
Update: It appears that Davis Selected Advisers is finding bargains in other financial stocks. Dow Jones Newswire reports:
‘Arizona mutual funds manager Davis Selected Advisers LP raised its stake in MBIA Inc. to 5.1%, a vote of confidence in the largest U.S. bond insurer, which is trying to raise capital to save its vital AAA credit rating.
The news sent MBIA’s shares up as much as 12.7% and gave a lift to other companies in the sector. MBIA recently traded at $21.77, up 8.2%. Shares of rival Ambac Financial Group rose 9.4% to $29.18 in recent trading…’
Hat Tip: Rita Lee
- Geopolitics , Investing , Mutual Funds
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Kurt, do you have any word on who would be willing to buy into Countrywide Financial at this time? Seems to me that CFC would be a great deal with all that the company has done to clean up the subprimes from its portfolio, despite all the problems that the stock has faced.
Bank of America made a substantial investment in Countrywide. If you follow the link above to the post on Bill Miller, you will get his thoughts on Countrywide.