The Third Avenue Value Fund (Trades, Portfolio) released its first-quarter 2020 portfolio earlier this week, disclosing that it established two new positions and sold out of three others.
Part of the late Martin Whitman’s Third Avenue Management (Trades, Portfolio), which is based in New York, the fund relies on a high-conviction strategy, investing in undervalued securities across several different industries, market capitalizations and regions. Portfolio managers Matthew Fine and Michael Fineman use fundamental analysis to find stocks trading below their intrinsic value that compound asset values at double-digit rates.
Taking these criteria into consideration, the fund entered positions in Macerich Co. (MAC, Financial) and Quinenco SA (XSGO:QUINENCO, Financial) during the quarter. It also divested of its long-held holdings of Investor AB (OSTO:INVEB, Financial), Brookfield Asset Management Inc. (TSX:BAM.A, Financial) and Wheelock and Co. Ltd. (HKSE:00020, Financial).
Macerich
The fund invested in 304,346 shares of Macerich, dedicating 1.33% of the equity portfolio to the position. The stock traded for an average price of $26.40 per share during the quarter.
The Santa Monica, California-based real estate investment trust, which invests in shopping centers, has an $823.76 million market cap; its shares were trading around $5.92 on Tuesday with a price-earnings ratio of 8.57, a price-book ratio of 0.31 and a price-sales ratio of 0.9.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 10 out of 10 also supports this observation since the share price, price-book ratio and price-sales ratio are all near 10-year lows.
In the fund’s fourth-quarter 2019 commentary, Fine and Fineman wrote that while a “spate of recent retail bankruptcies and an existing debt load that is larger than we would prefer,” the “operating performance of the underlying assets has been strong and we are confident that we are materially underpaying for the equity relative to net asset value.”
GuruFocus rated Macerich’s financial strength 3 out of 10. As a result of issuing approximately $354.95 million in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of -0.03 also warns that the company could be in danger of going bankrupt. In addition, since the company’s return on invested capital outweighs its weighted average cost of capital, it may not be capital efficient.
The company’s profitability fared a bit better with a 6 out of 10 rating even though its margins are in decline and its returns underperform a majority of competitors. Macerich also has a moderate Piotroski F-Score of 6, which indicates operations are stable. The business predictability rank of one out of five stars, however, is on watch as a result of declining revenue per share over the past five years. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.
Of the gurus invested in the stock, the Smead Value Fund (Trades, Portfolio) has the largest stake with 1.01% of outstanding shares. Other top guru shareholders include Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Chris Davis (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Philippe Laffont (Trades, Portfolio).
Quinenco
Third Avenue picked up 3.32 million shares of Quinenco, allocating 1.12% of the equity portfolio to the stake. Shares traded for an average price of 1,514.66 Chilean pesos ($1.79) each during the quarter.
The Chilean holding company, which invests in companies active in the industrial and financial sectors, has a market cap of 1.57 trillion pesos; its shares closed at 945.56 pesos on Monday with a price-earnings ratio of 8.35 and a price-book ratio of 0.47.
In the fund’s fourth-quarter 2019 commentary, the portfolio managers wrote that they have been familiar with Quinenco and its management for over a decade. The fund finally established a position following a decline in the share price due to anti-government protests in Chile in October that sent the value of the peso lower and impacted equities in a range of industries. Fine and Fineman wrote:
“We view the underlying companies as well-managed and conservatively financed, often with dominant market positions. Indeed, various Quiñenco controlled companies are respected business partners for global companies, such as Heineken, Citigroup and Shell, seeking to operate in Chile. It is our view that we were able to purchase shares at a time when both the underlying businesses were atypically inexpensive and the size of discount offered through shares of Quiñenco was unusually large.”
Investor
The fund sold its 325,405 remaining shares of Investor, impacting the equity portfolio by -2.77%. During the quarter, the stock traded for an average price of 515.8 Swedish krona ($51.93) per share.
The Swedish investment holding company has a market cap of 340.76 billion krona; its shares closed at 448.3 krona on Monday with a price-earnings ratio of 15.13, a price-book ratio of 0.87 and a price-sales ratio of 5.3.
GuruFocus estimates the fund has gained 35.98% on the investment since the fourth quarter of 2013.
Brookfield Asset Management
The Value Fund sold its 260,888 remaining shares of Brookfield Asset Management. The trade had an impact of -2.40% on the equity portfolio. The stock traded for an average per-share price of 77.01 Canadian dollars ($54.36) during the quarter.
The Toronto-based alternative asset management company has a CA$63.07 billion market cap; its shares closed at CA$62.48 on Monday with a price-earnings ratio of 18.22, a price-book ratio of 1.55 and a price-sales ratio of 0.68.
According to GuruFocus, the Value Fund has gained 71.47% on the investment since the first quarter of 2013.
Wheelock
Third Avenue sold its 2.26 million-share stake in Wheelock, which had an impact of -2.33% on the equity portfolio. During the quarter, the stock traded for an average price of 50.22 Hong Kong dollars ($6.48) per share.
The Hong Kong-based real estate development company has a market cap of HK$106.74 billion; its shares closed at HK$53.1 on Tuesday with a price-earnings ratio of 6.3, a price-book ratio of 0.39 and a price-sales ratio of 2.19.
Based on GuruFocus data, the fund has lost approximately 6.7% on the investment since the second quarter of 2013.
Additional trades and portfolio performance
During the quarter, the Value Fund also added to its position in Five Point Holdings LLC (FPH) and reduced its holdings of several other securities, including Lundin Mining Corp. (TSX:LUN), Weyerhaeuser Co. (WY), Buzzi Unicem SpA (MIL:BZU) and Comerica Inc. (CMA).
Third Avenue’s $509 million equity portfolio, which is composed of 27 stocks, is largely invested in the basic materials sector, followed by smaller positions in the consumer cyclical and industrials spaces.
GuruFocus data indicates the fund returned 12.85% in 2019, underperforming the S&P 500’s 31.48% return.
Disclosure: No positions.
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