Davis on Clipper's 'Camel' Picks

Dan Culloton: Let's talk about some of the other names that have shown up on the portfolio. At least I noticed in Clipper (CFIMX), which I interpret to be some of your highest conviction ideas, that Diageo (DEO) showed up in there in recent months. I wonder what attracts your firm to that stock.

Christopher Davis: I think maybe what I can do is talk about a category of stocks that is in Clipper, and we sometimes call them "camels." You think about a camel as something you can rid through the desert. It doesn't need water, it can go a long way. In the chaos that we've been in, it's true that there are probably some cyclical firms, including some in financials, that could get very cheap. If you buy them right, you get them near the bottom. We also say the ones that do best in the recovery are the ones that just barely kept their lips above water.

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We generally don't try to invest like that, but we recognize that in a recovery we will lag those that called that just right. On the other hand, it's a dangerous game if they're too early.

Another category of companies that got very inexpensive were what Peter Lynch used to call the "stalwarts." He used say that you sometimes only get one chance in a decade, sometimes even one chance in a generation, to buy really good companies at 10 or 12 times earnings. The Johnson & Johnsons (JNJ), the Diageos, Procter & Gamble (PG), Colgate-Palmolive (CL). These are some of the great, durable companies with terrific balance sheets, with no need for financing, very durable businesses, high dividend yields.

Well, here's the math. If you can buy a company that can grow 10% a year, if you can buy that company at a 10 multiple and pick up a 3% dividend along the way.... And over time that multiple, let's say over a decade that multiple ends up at 15, you get a staggering return.

Because you get the 10% growth of the business, you get the 50% multiple reevaluation, plus you get the dividend yield. Well, that works out about an 18% or an 18.5% compound. For a business that's only growing 10%.

So we think a lot about, in this sort of world, having the opportunity to buy those types of businesses at very low multiples.

Dan: Where does Loews fit into that?

Christopher: Loews  (L) is in a second category. Now to be clear, this is Loews the Tisch's holding company as opposed to Lowe's the home improvement shop. And we have a second category that we think of in the world that we're in, which is those companies where the temperament, the balance sheet, the disposition and discipline of management is that they're able to take advantage - they have a record of taking advantage - of chaos. And of course the best example is Berkshire-Hathaway (BRK.A). They went in this with $50 billion more in cash and a temperament to be able to look for opportunities in the chaos.

Well, the Tisches and the Loews management team have had that record. Buying pipeline companies during the Enron debacle, getting into the tobacco business - early and controversial - realizing enormous value for that before spinning it off.

So they have a record of being opportunistic. They certainly had the balance sheet and the valuation to be able to do so. Now I don't know what they'll do. I mean, their shares treated at discount to simply the sum of the parts, so I think they have lots of opportunities.

But I think I would put that in a different category than sort of the high quality global growth companies and put it in this category of opportunistic entrepreneurial, well-capitalized, conservatively-oriented but opportunistic management teams.

Dan: Is this a case where you could go out and buy the publicly traded subsidiaries of Loews and maybe still do as well and still benefit from their management expertise?

Christopher: I don't think so. I think that in most cases in this sort of company, you want to be invested where the entrepreneurial money, where the insider, the management family investment is. That really aligns your interests. They own Loews Corp. So when you get into thing like tracking stocks or the independent pieces, we look at them in terms of valuation and we add them up to the parts, and that's how we get the fact that the parent is actually cheaper than the sum of the parts.

But our feeling is, we'd rather be invested in the same entity as they are, at the holding company level rather than in the subsidiaries.

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