Chip Rewey, a GuruFocus Value Conference 2016 speaker, joined Third Avenue Management (Trades, Portfolio) in 2014 as lead portfolio manager for the value and small-cap funds and upholds many of the firm’s investing tenets as developed by founder Marty Whitman – centered on long-term factors including book value, creditworthiness and net asset value (NAV).
“Our investment process is geared to identify good businesses that are led by strong management teams who are good capital allocators, along with a significant discount to a fair value in the market,” Rewey said in his third quarter letter. “Creditworthiness is the starting point for us when assessing any investment. Investing in well capitalized companies allows us to wait out earnings swings because we are confident our management teams will not be forced to do things that would hurt shareholder value to meet short-term financial considerations.”
The best measure of compounding NAV is based on growth in book value per share growth over time rather than highly-prized earnings growth. Book value growth requires companies to buy and sell assets profitably, reduce net debt per share or engage in buybacks which increase value over time but are harder to assess but more accurately measure a company’s value.
“Companies that are rapidly growing EPS are clearly the ‘prom queens’ of today’s markets, while others are being left behind,” he said.
For the year through July 31, sectors with relatively high earnings growth but high book values, such as Health Care and Consumer Discretionary were seeing higher year-to-date performance, while companies with relatively low book value and low earnings per share, such as Energy and Utilities, were trading lower for the year, according to data from Bloomberg.
For the first half of the year, the third Avenue Value Fund institutional class (TAVFX, Financial) returned 1.74%, compared to 1.23% for the S&P 500 Index. On a five-year annualized basis, it returned 4.24%, versus 7.89% for the index and since its 1990 inception, it returned 11.58%, versus 10.35% for the index.
Rewey’s top holdings of the fund were: Comerica Inc. (CMA, Financial), Cavco Industries Inc. (CVCO, Financial), Weyerhaeuser Co. (WY, Financial), Bank of New York Mellon Corp. (BK, Financial) and Covanta Holding Corp. (CVA, Financial).
Comerica Inc. (CMA, Financial)
As of July 31, the Third Avenue Value Fund held 2,152,249 shares of Comerica Inc., a 5.5% portfolio weight. The company has grown book value at a five-year annual rate of 5.4%.
In his third quarter letter, Rewey said Comerica was “buying back stock at attractive prices while maintaining robust capital levels.”
Comerica Inc. is incorporated under the laws of the State of Delaware in 1973. Comerica Inc. has a market cap of $7.22 billion; its shares were traded around $40.57 with a P/E ratio of 13.12 and P/S ratio of 2.83. The dividend yield of Comerica Inc. stocks is 2.02%. Comerica Inc. had an annual average earnings growth of 106.4% over the past five years.
Cavco Industries Inc. (CVCO, Financial)
The fund held 1,422,725 shares of Cavco Industries Inc., a 5.06% portfolio weight and the equivalent of 16% of the company. Cavco Industries had a five-year annual book value growth rate of 11%.
Rewey said Cavco was engaging in “strategic asset purchases to drive growth while maintaining net cash per share.”
Cavco Industries Inc. was formed on June 30, 2003, as a successor corporation to previous Cavco entities operating since 1965. Cavco Industries Inc. has a market cap of $596.13 million; its shares were traded at around $67.18 with a P/E ratio of 25.71 and P/S ratio of 1.02.
Weyerhaeuser Co. (WY, Financial)
The fund held 2,466,390 shares of Weyerhaeuser Co., a 4.21% portfolio weight. Weyerhaeuser had a five-year book value growth rate of 7.8%.
Rewey said Weyerhaeuser was “restructuring cost actions and buying back shares, post its housing unit spin-off.”
Weyerhaeuser Co. was incorporated in the state of Washington in January 1900. Weyerhaeuser Co. has a market cap of $14.22 billion; its shares were traded at around $27.66 with a P/E ratio of 9.59 and P/S ratio of 2.02. The dividend yield of Weyerhaeuser Co. stocks is 4.27%. Weyerhaeuser Co. had an annual average earnings growth of 47.2% over the past five years.
Bank of New York Mellon Corp. (BK, Financial)
The fund held 2,424,813 shares of Bank of New York Mellon Corp., a 5.57% portfolio weight. The company had a five-year annual book value growth rate of 6.2%.
Rewey said Bank of New York Mellon was “cutting costs and returning capital through share buybacks and dividends while maintaining high capital levels.”
Bank of New York Mellon Corp. was formed as a bank holding company. The company has been in business since 1784. Bank of New York Mellon Corp. has a market cap of $42.62 billion; its shares were traded around $38.52 with a P/E ratio of 15.38 and P/S ratio of 2.73. The dividend yield of Bank of New York Mellon Corp. stocks is 1.75%.
Covanta Holding Corp. (CVA, Financial)
The fund held 3,606,707 shares of Covanta Holding Corp., a 3.97% portfolio weight.
Covanta Holding Corp. was incorporated in Delaware on April 16, 1992. Covanta Holding Corp. has a market cap of $2.49 billion; its shares were traded around $18.66 with a P/S ratio of 1.5. The dividend yield of Covanta Holding Corp. stocks is 5.35%.
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