Inside Financial Services

CHRIS DAVIS: BANKS ARE GREAT BUSINESSES, AND THEIR MULTIPLES ARE LOW. WHAT’S NOT TO LIKE?

Chris Davis talks to Fortune about the financials:

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Chris Davis talks to Fortune about the financials:

The Fed recently allowed many banks to increase dividends and buy back shares after a second round of stress tests. Is the worst over?

Obviously the headlines are bad, and there’s a lot of regulatory uncertainty. What are the characteristics of financial companies that make them attractive to a long-term investor? No. 1 is they’re not obsolete-able. Making a spread on money is about the oldest business there is. We like that financials tend to trade at very low valuations. Let’s use Wells Fargo as an example. Wells has outperformed the market over the last one-, three-, five-, and 10-year periods. And it trades at eight times earnings. Yet Wells and the other survivors are obviously way better off than they were before the crisis. . . .

Wells is a great example. For the record, by the way the Street expects its earnings per share to grow by 24% this year, then 24% in 2012 and 17% in 2013. . . . Eight times earnings. . . . Crazy. . .

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