In his annual letter to shareholders, Martin Whitman of Third Avenue Funds railed against Modern Capital Theory (efficient market theory), arguing instead that it is possible to outperform markets by bottom-up analysis of businesses and the securities they issue. He also listed four characteristics that define a Third Avenue Funds portfolio holding:
1. The companies enjoy super strong financial positions.
2. The common stocks are priced at discounts of 25% to 75% of readily ascertainable NAV. (In contrast, the Dow Jones Industrial Average, at October 31, 2013, was priced at 2.86 times book value).
3. Full disclosures, including reliable audits, are given to the OPMI and the securities are traded in markets that are highly regulated with substantial investor protections (e.g., U.S., Canada, Hong Kong, England).
4. The businesses have good prospects for growing NAV after adding back dividends, by not less than 10% compounded annually over the next three to seven years.
He added that in the current market, “good companies, with good growth prospects, selling at discounts of greater than 45% are not uncommon.”
In the fourth quarter, his Third Avenue Management bought two new stocks, and added to holdings of four others. Whitman looked abroad for the majority of these purchases.
Vodafone UK (LSE:VOD)
Third Avenue purchased 22.2 million new shares of Vodafone in the fourth quarter, giving the position a 3.5% portfolio weighting. The share price on Thursday is around £2.37, after gaining almost 53% last year.
Third Avenue explained its reasoning for adding a position in Vodafone in its fourth quarter letter:
“Fund Management initiated a position in Vodafone (VOD) Common during the quarter. Vodafone is a leading provider of telecommunications services based in the United Kingdom. This investment is discussed in more detail in this quarter's Third Avenue International Value Fund shareholder letter. The Vodafone common investment made by the Fund was prompted by the company's sale of its 45% stake in Verizon Wireless at a tremendous price (9.4 times EBITDA). Shares of Vodafone Common were purchased at less than five times pro-forma EBITDA and at a mid-single digit dividend yield in the Fund. Although conditions in the European telecommunications industry are difficult, Vodafone's business is very cash generative and the proceeds from the Verizon Wireless transaction will enable the company to reinvest more in its networks than many of its competitors while maintaining a very strong financial position and a healthy dividend. Vodafone also has substantial exposure to emerging markets, such as India and Africa, that are experiencing tremendous growth in demand for smart phones and data.”
Vodafone Group PLC is a provider of mobile communications. Vodafone Group PLC has a market cap of $188.48 billion; its shares were traded at around $38.89 with a P/E ratio of 272.60 and P/S ratio of 2.60. The dividend yield of Vodafone Group PLC stocks is 4.00%. Vodafone Group PLC had an annual average earnings growth of 2.00% over the past five years.
Tejon Ranch Co. Warrants (TRC.WS)
Third Avenue bought 200,255 warrants of Tejon Ranch Co., amounting to 0.047% of the portfolio. The holding is valued around $1.07 million.
The company issued 3 million warrants to shareholders on Aug. 28 as a form of dividend, giving holders the right to purchase shares of the company at $40.00 each. Holders of Tejon stock received 0.14771 warrants per owned share of the company they held. Third Avenue owns roughly 1,221,894 shares of Tejon Ranch Co.
Tejon Ranch Co. is a diversified real estate development and agribusiness company, holding 270,000 acres of land north of Los Angeles.
Pargesa Holding SA (XSWX:PARG)
Third Avenue increased its holding of Pargesa Holding by 80.9%, now sized at 486,565 shares. This accounts for 1.7% of the portfolio.
Pargesa Holding SA is a Switzerland-based investment company and the parent company of Pargesa Group, which acts in various industry and services sectors through its holdings in a number of operating companies. Pargesa Holding SA has a market cap of $6.09 billion; its shares were traded at around $71.90 with a P/E ratio of 14.60 and P/S ratio of 1.26. The dividend yield of Pargesa Holding SA stocks is 2.32%.
Total SA (XPAR:FP)
Whitman expanded his position in Total SA by 49.89%, to 1,234,649 shares. The portfolio weighting is 3.3%.
TOTAL SA was incorporated in France on March 28, 1924. Total SA has a market cap of $100.99 billion; its shares were traded at around $44.33 with a P/E ratio of 11.10 and P/S ratio of 0.58. The dividend yield of Total SA stocks is 5.30%. Total SA had an annual average earnings growth of 5.80% over the past 10 years.
Encana Corp. (TSX:ECA)
Third Avenue increased its position in Encana Corp. by 26.23% to 2,165,824 shares. The holding encompasses 1.7% of the portfolio.
Encana Corp was formed in 2002 through the business combination of Alberta Energy Company Ltd. and PanCanadian Energy Corporation. Encana Corp. has a market cap of $14.2 billion; its shares were traded at around $19.18 with a P/E ratio of 33.30 and P/S ratio of 2.18. The dividend yield of Encana Corp. stocks is 3.60%.
White Mountains Insurance Group Ltd. (WTM)
Third Avenue increased its holding of White Mountains Insurance Group by 13.8% to 54,421 shares. The position is 1.4% of the portfolio.
White Mountains Insurance Group Ltd. is an exempted Bermuda limited liability company whose main businesses are conducted through its property and casualty insurance and reinsurance subsidiaries and affiliates. White Mountains Insurance Group Ltd. has a market cap of $3.69 billion; its shares were traded at around $597.01 with a P/E ratio of 14.00 and P/S ratio of 1.70. The dividend yield of White Mountains Insurance Group Ltd. stocks is 0.20%.
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