Davis Double Play: Earnings Growth Plus Multiple Expansion

“Davis acquired 1,000 shares of Insurance USA (a fictitious example) for $4,000 when the company earned $1 a share. He held on until the company earned $8 a share and a crowd of camp followers pounced on the opportunity. What he'd bought for four times $1, they bought for 18 times $8. His $4,000 was now worth $144,000 in Mr. Market's estimation. In terms of profit, he made 36 times his initial outlay, plus whatever dividend checks had landed in his mailbox during the waiting period. Davis called this sort of lucrative transformation "Davis Double Play."”

“falling rates favored paper assets and not brick, mortar, and baubles-Shelby populated Venture with financial stocks that had underachieved in the hard-asset prosperity of the 1970s. Besides being timely, bank shares were very affordable. They were selling at 10 times earnings, and their earnings were growing at a steady 12 to 15 percent. Banks' stodgy reputation caused investors to underrate their future prospects. This was a perfect setup for the latest Davis Double Play.”