Davis Double Play

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What is Davis Double Play?

Davis Double Play is the share-price result when earnings grow and buyers also pay a higher multiple of those earnings.

“taking the growth stock in disguise one step further by providing the best of both worlds: finding a growth stock in disguise, plus realizing a price-to-earnings multiple expansion as investors appreciate the growth opportunities and bid up the stock. His goal was always to get the double play.”

That sentence is Christopher C. Davis, the grandson, in R. J. Shook, The Winner’s Circle (John Wiley & Sons, 2005), chapter 4, pages 61–62. It starts in the middle of his sentence. He has just said that his grandfather coined the term Davis Double Play. The words are the grandson’s account of what the grandfather meant. They are not a line from a 1947 document, and this page did not read a book by Shelby Cullom Davis that prints them. A growth stock in disguise, in the sentence just before that, is a company whose earnings are poised to grow faster than investors expected, or whose earnings are growing at a value price. That phrase is the first half. The double play adds the second half: the multiple rises as investors bid the stock up. He then says that if you are wrong on the rising price-to-earnings multiple, but you are right on the earnings, you can still do well. The worked figures below are arithmetic, not a holding and not a study. One dollar of earnings at 10 times earnings is a price of $10. Earnings become$2, a ratio of 2, and the multiple becomes 15, a ratio of 1.5. The price becomes $30, a ratio of 3. Three is 2 times 1.5. It is not 2 plus 1.5. If earnings double and the multiple stays at 10, the price is$20. That path can still be a good result. It is not this name. A higher multiple means the price stands for more years of the same earnings. That is what the multiple is. It is not a second term he coined. The same multiplication is a shop whose yearly profit doubles while a buyer pays for one and a half times as many years of that profit. The sale price is three times the old price, not two and a half times. No sale in the chapter uses these figures. Compound Growth is the earnings engine on its own, repeated through time. The second engine on this page is what buyers will pay for a year of those earnings. Expected Value weights outcomes by chance. The product of two ratios is not that weighted payoff.

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Davis Double Play in 3 Depths

• Beginner: Write the earnings ratio and the multiple ratio before you name the rise. A doubling of earnings and a multiple that is one and a half times as high make a price that is three times as high.
• Practitioner: If only the earnings moved, keep that result and do not give it this name. Christopher C. Davis says you can still do well when the multiple does not rise.
• Advanced: The paired decline he reports from his grandfather is a lower estimate of future earnings, coupled with a lower multiple on those low earnings. The family’s capital account in this chapter is not a measured split into the two engines.

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Origin

The name on this page is Davis Double Play. The citation is R. J. Shook, The Winner’s Circle: Wall Street’s Best Mutual Fund Managers, John Wiley & Sons, 2005, chapter 4, “Christopher C. Davis,” pages 61–62. Christopher C. Davis says, “My grandfather also coined the term Davis Double Play,” and then gives the sentence quoted above. The book is an interview account. It does not show a dated paper in which Shelby Cullom Davis printed the two-word name. Three people share the surname. Shelby Cullom Davis is the grandfather. In the 1940s he was deputy superintendent of insurance for the State of New York, and in 1947 he started Shelby Cullom Davis & Co. with borrowed money. His son, Shelby M.C. Davis, initiated the Davis New York Venture Fund in 1969. Christopher C. Davis is the grandson and the speaker in this chapter. He was born in 1965 and joined his father’s firm in 1991. Other people named Davis are not this family. When he looks for the double play, Christopher C. Davis prefers growth rates between 8 and 15 percent, because he says these rates are easier to sustain. That is his preference. It is not a law that the multiple then expands. He reports his grandfather’s line about investing in “the doers, not the bluffers,” and the warning that follows: the trouble with paying 30 times earnings for 30 percent growth is that it will not grow at 30 percent for long. When growth slows, “you witness a lower estimate of future earnings coupled with a lower multiple on those low earnings, a term he called the Big Loss.” “The Big Loss is the opposite of the Double Play. Sort of like compression.” These are his statements. They are not a counted sample, and they are not a ban on every stock priced at 30 times earnings.

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Key Points

Four readings keep the product, the earnings-only path, and the paired decline apart. A price that went up is not yet this name.

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Applications

Four checks stop a price move from borrowing this name.

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Case Study

In the 1940s Shelby Cullom Davis was deputy superintendent of insurance for the State of New York. The chapter says he determined that high commissions paid to insurance salespeople cut profits in the short run, and that the same policies would later produce tremendous cash flows. That is his determination. The chapter does not print a table of those cash flows. In 1947, with borrowed money, he started Shelby Cullom Davis & Co., specializing in insurance companies, along with banks and other financial institutions. The book says the Dow staggered at 180 and Wall Street ignored insurance stocks. “Staggered at 180” is the book’s wording. This page did not check it against a daily close. What he saw, the book says, was a chance to invest in companies with expanding earnings at a price he felt was discounted. The same pages say he turned $100,000 into more than$800 million by the early 1990s. He died in 1994. The paragraph calls him an investor, an author, a philanthropist, and ambassador to Switzerland. It does not print the years of that post, and it does not split “more than $800 million” into earnings growth, a change in the multiple, and the money borrowed in 1947. Do not compute a yearly rate from those two sums. “The early 1990s” is the book’s phrase, not a single calendar date. Christopher C. Davis, in the same chapter, says the grandfather coined Davis Double Play. The capital account is the setting of the name. It is not a measured double play. His son Shelby M.C. Davis is a third person: he initiated the Davis New York Venture Fund in 1969. Starting from insurance he had administered is the Circle of Competence on this story. A price he felt was discounted is the Margin of Safety sentence in the chapter. Neither page owns the $100,000 or the sum above$800 million.

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Boundaries and Failure Modes

The name fails when only one ratio moved. Earnings growth at an unchanged multiple can still be a good result, and Christopher C. Davis says so. It is not the double play. A higher multiple on unchanged earnings is the other half alone. Adding the two ratios, or calling any large gain by this name, drops the identity the term is for. The Big Loss fails as a label when it is stretched. The sentence in the book is a lower estimate of future earnings coupled with a lower multiple on those low earnings. A completed drop in last year’s earnings, a multiple that did not change, or any loss in an account, is a wider net than he described. He calls the pair “sort of like compression.” He does not print a sample of those compressions. A further boundary is the industry remark. He says his grandfather and his father felt that financial stocks had historically been one of the best places for the combination, and that the industry “always sells at a discount.” The reasons he offers are maybes: leverage, a commodity business, bankruptcies, a cycle, or analysts reluctant to recommend other securities firms. The chapter does not print a table of those discounts. He also names AIG and Berkshire Hathaway as growth among financial companies over the last 20 or 30 years, as spoken in this 2005 book. That list is not a rule that every financial stock is cheap, and it is not a double-play result. The band from 8 to 15 percent is his preferred range because he thinks those rates are easier to sustain. It does not promise that the multiple will expand. The 30-times warning is the saying above, not a law about every stock with that multiple. John Rothchild, The Davis Dynasty (Wiley, 2001), was not opened. No figure from that book is on this page. Selling a holding because the price has already risen is the Disposition Effect. That page does not test these two ratios, and its rates do not belong here.

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Common Misconceptions

Three retellings travel with the name. One adds the ratios. One treats the fortune as a split. One calls any loss the Big Loss.

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Related Concepts

Davis Double Play sits beside a discount to a value you can defend, beside staying inside work you have actually done, beside growth that repeats, and beside a payoff weighted by chance. None of those pages is the product of an earnings ratio and a multiple.

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One-Line Takeaway