Stephen Davenport, Director of Alternative Investments, Decatur Capital
Stephen Davenport is the Director of Alternative Investments at Decatur Capital Management Inc. and is responsible for the firm’s Alternative strategies including buying puts for equity portfolio insurance.
He has an extensive knowledge of equities, derivatives and market dynamics, and uses a combination of quantitative and fundamental approach in managing assets.
Mr. Davenport received a B.S. degree in industrial engineering at Columbia University, a B.S. degree in math/computer science at Providence College, and a M.S. degree in finance from Boston College.
Mr. Davenport began his career as an Industrial Engineer in the manufacturing industry, and then moved into finance, working for State Street Global Advisors in the Private Wealth Management group. At SSGA, he developed a tax-optimized solution that utilized alpha, tracking risks, taxes, and other transaction costs for over 5,000 accounts.
After obtaining the CFA designation, he began directing derivative strategies at Fleet Bank. Mr. Davenport moved to Atlanta for the role of Director of Equity Risk Management at Wilmington Trust.
He developed strategies for premium income, exit and buying puts and calls for equity collars.
After Wilmington Trust, he became a Private Wealth provider at SunTrust managing derivative strategies. Mr. Davenport has held multiple volunteer roles and leadership positions with the CFA Society Atlanta, ASFIP Foundation.
During his role as President, he established a financial literacy foundation, with the main goal of helping the metro Atlanta community. In 2019, he received the FLY (Financial Leader of the Year) award from McCracken Alliance for his work in the financial literacy field.
In this 4,363 word interview, exclusively in the Wall Street Transcript, Mr. Davenport details buying puts as a strategy for his clients as well as a variety of other option trading tactics.
“We can sense the market is pretty overstimulated from a standpoint of liquidity that’s being provided by ultra-low rates. The buying of a lot of instruments by the Fed. The fiscal stimulus that’s been put in place and is going to be further added to has created unprecedented liquidity, which causes distortions.
When interest rates go below the rate of inflation, they’re basically real negative returns. People have to then take assets out of bank accounts and put them to work in risk markets. You look at what happened with GameStop (NYSE:GME), and there was obviously a lot of people who were on Reddit with money.
They probably had stimulus payments, and when you don’t differentiate who gets a stimulus, it creates liquidity, and that liquidity has to go somewhere.
I think we’ve seen very unusual things going on with some of the IPOs, SPACs and some of what’s happened in Reddit with GameStop and AMC theaters (NYSE:AMC). Companies aren’t necessarily doing anything that I would say is wrong or right.
The reaction of media and the idea of Robinhood, it was really a very strange story, right? I grew up talking about Robin Hood as taking from the rich and giving to the poor, and I’m not sure that the people who were making money on the Robinhood trades were the poor.
It’s just a strange characterization of the hedge funds who are losing money, but there were probably just as many hedge funds who were making money. There were probably people that said, “Hey, I’m going to take the other side of this trade and get behind all these people and take advantage of that momentum.”
It’s very hard for us to sound bite the markets and say, “Here, I’m going to take all of these trades and all the things that are happening and I’m going to give you a 15-second summary.” Markets are a little more complicated.
There was a lot of use of options and specifically call options. Seventy-five percent of the options used in August were duration of less than two weeks. I don’t consider that investment decisions if you’re horizon is two weeks or less and you’re using leverage to implement it. I think of investing as a one-year to three-year horizon. When you have a timeframe less than that, I consider that trading, not investing.”
Buying puts would have been a successful portfolio strategy for Cisco executives in the early 2000s:
“I remember when we looked at Cisco (NASDAQ:CSCO) in 2000 and we said, “Cisco is going to be a trillion-dollar company; they are going to continue to have 40% growth in revenue for the next five years,” and it really was like, “How are we going to use that much bandwidth?” We’re saying the same thing with some of these names like Tesla (NASDAQ:TSLA) and Amazon.
They are huge market caps. How do we see them fitting into that market cap and making it more reasonable in terms of a p/e multiple? It’s very difficult to get to those, so I look at a name like Etsy that’s smaller, that has a huge market runway in front of it and sells at a similar multiple. Degas feels that maybe Etsy is the better way to play stay-at-home, small business growth.
Another example would be GM (NYSE:GM) versus Tesla. We looked at the auto space and the EV market, and Tesla, most of their revenue now is coming from carbon credits, and you look at their actual vehicle sales and it’s a small percentage in terms of their profit.
You look at a car manufacturer like GM and their Volt and other things that they have in the pipeline, and you realize that they’re building a traditional business where they’re looking at profitability per vehicle, and they’re being priced in the EV space as their multiple per vehicle, versus the multiple on Tesla per vehicle is just quite a bit different.
So we looked and said, if we think EV is going to be a disruptor and is going to continue to grow, who is going to be the beneficiary? With Tesla up 750% last year, it’s hard to get in that car. It’s hard to go for that ride when you look at GM and they’ve got a huge commitment to the space and they’ve got a deep capability and they’ve got extensive infrastructure.
Somebody is going to build this EV industry out. Isn’t Tesla more of a specialty carmaker and is GM more of a general carmaker?
The general vehicle switching to EV — there’s a lot more vehicles that are going to get sold in the $10,000 to $30,000 range than are going to get sold in the $70,000 to $90,000 range. We just felt that GM might be the exposure that we wanted to take to gain EV exposure.”
Get more insight into buying puts and other option strategies by reading the entire 4,363 word interview with Stephen Davenport, exclusively in the Wall Street Transcript.
Stephen Davenport, Decatur Capital Management Inc., email: sdavenport@decaturcapital.com
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