Third Avenue Value Fund (Trades, Portfolio) has revealed its portfolio for the first quarter, which ended Jan. 31. Top trades include new buys into Lazard Ltd. (LAZ, Financial) and Jardine Cycle & Carriage Ltd. (SGX:C07, Financial) and a reduction in Korn Ferry (KFY, Financial). The fund also sold out of its Vornado Realty Trust (VNO, Financial) and Lennar Corp. (LEN.B, Financial) holdings.
The fund's strategy was launched in 1990 under the leadership of Martin J. Whitman. The high-conviction strategy seeks to invest in undervalued securities across industries, regions and market capitalizations. Fundamental analysis is used to identify stocks trading below their intrinsic value that compound asset values at double-digit rates. The strategy's flexible mandate takes a global, all-cap equities approach and allows for opportunistic investments in credit securities across the capital structure.
Portfolio overview
At the end of the quarter, the fund's portfolio contained 31 stocks, with two new holdings. It was valued at $505 million and has seen a turnover rate of 7%. Top holdings at the end of the quarter were Interfor Corp. (TSX:IFP, Financial), Bank of Ireland Group PLC (LSE:BIRG, Financial), Capstone Mining Corp. (TSX:CS, Financial), Lundin Mining Corp. (TSX:LUN) and Warrior Met Coal Inc. (HCC).
By weight, the top three sectors represented are basic materials (31.86%), financial services (20.99%) and industrials (17.23%).
Lazard
The fund established a new buy into Lazard (LAZ, Financial) during its first quarter with the purchase of 316,443 shares. During the quarter, the shares traded at an average price of $40.44. Overall, the purchase had a 2.58% impact on the portfolio and GuruFocus estimates the total gain of the holding at 8.56%.
Lazard has a storied history that can be traced back to 1848. The company's revenue is nearly equally split between financial advisory, such as acquisition and restructuring advisory, and asset management. The company's asset management business is primarily equities (over 80% of assets under management), has an international focus and is geared toward institutional clients. By geography, the company earns approximately 60% of revenue in the Americas, 30% in Europe, the Middle East and Africa and 10% in Asia-Pacific. Lazard has offices in over 40 cities across more than 25 countries and over 2,900 employees.
On March 30, the stock was trading at $43.90 per share with a market cap of $4.71 billion. According to the GF Value Line, the shares are trading at fair value.
GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 9 out of 10. There are currently two severe warning signs issued for a declining gross margin percentage and poor financial strength. The company's cash-to-debt ratio of 1.1 ranks the company worse than 67.53% of competitors and the company has seen debt increase drastically since 2018.
Jardine Cycle & Carriage
Another new holding was established in Jardine Cycle & Carriage (SGX:C07, Financial) during the fund's first quarter. The new holding was created with the purchase of 700,500 shares that traded at an average price of 20.53 Singapore dollars ($15.23). The holding has gained an estimated 9.84% and the purchase had a 2.24% impact on the portfolio.
Jardine Cycle & Carriage is a conglomerate primarily focused on investments in the manufacture and distribution of motor vehicles in Southeast Asia. The company operates through three segments: Astra, direct motor interests and other interests. The Astra segment includes the company's controlling interest in Astra International, an automotive group in Southeast Asia. Direct motor interests includes automotive operations in Singapore, Malaysia, Myanmar, Indonesia and Vietnam. The other interests segment includes Southeast Asia investments in Siam City Cement and Refrigeration Electrical Engineering Corp.
As of March 30, the stock was trading at S$22.55 per share with a market cap of S$9.06 billion. The shares are modestly overvalued according to the GF Value Line.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 9 out of 10. There is currently one severe warning sign for an Altman Z-Score of 1.13 placing the company in the distress column. The company maintains solid operating and net margins that contribute to the strong profitability rank.
Korn Ferry
The fund's largest reduction in a holding was seen by the fresh-faced Korn Ferry (KFY, Financial) holding. The fund cut 280,327 shares from the position that was established in the fourth quarter. The shares that were sold traded at an average price of $42.06. The sale had a -2.12% impact on the equity portfolio and GuruFocus estimates the total gain of the holding at 47.66% during its short lifetime.
Korn Ferry is a United States-based company engaged in organizational consulting and management recruitment that helps clients fill mid- to high-level management positions. The largest of its revenue segments is its advisory segment, which provides consulting services related to organizational structure. The executive search segment provides executive-level talent sourcing. The recruitment process outsourcing and professional search segment provide broad-level talent sourcing. The company has operations in North America, Asia-Pacific, Latin America and other regions.
The stock was trading at $61.96 with a market cap of $3.35 billion on March 30. The GF Value Line shows the shares trading at a significantly overvalued rating.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 2 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. Despite the moderate financial strength rating, the company has struggled to increase value as the weighted average cost of capital has consistently exceeded the return on invested capital.
Vornado Realty Trust
The fund cut its Vornado Realty Trust (VNO, Financial) holding from the portfolio during the quarter. The 258,031 shares that were purchased almost a year earlier sold at an average price of $37.85 per share. The sale had an overall impact of -1.99% on the portfolio and GuruFocus estimates the firm lost 21.24% on the holding.
Vornado owns and has ownership interest in Class A office and retail properties highly concentrated in Manhattan, with additional properties in San Francisco and Chicago. It operates as a real estate investment trust.
On March 30, the stock was trading at $46.57 per share with a market cap of $8.91 billion. The shares are trading at fair value based upon the GF Value Line.
GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 6 out of 10. There are currently six severe warning signs issued, including declining margins and extremely low interest coverage. 2020 saw net income drop to negative values as revenue also took a hit for the company.
Lennar
Another holding to be cut from the fund's portfolio was Lennar (LEN.B, Financial). The fund sold out of the remaining 127,126 shares after several large reductions in the previous quarters. The shares were sold at an average price of $61.88 during the quarter. Overall, the sale had a -1.81% impact on the portfolio and GuruFocus estimates the total gain of the holding at 12.77%.
After merging with CalAtlantic in February 2018, Lennar has become the largest homebuilder (by revenue) in the United States. The company's homebuilding operations target first-time, move-up and active adult homebuyers mainly under the Lennar brand name. Lennar's financial services segment provides mortgage financing and related services to its homebuyers. Miami-based Lennar is also involved in multifamily construction.
As of March 30, the stock was trading at $82.93 per share with a market cap of $31.31 billion. According to the GF Value Line, the shares are significantly overvalued.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 7 out of 10. There is one severe warning sign issued for assets growing faster than revenue. The company saw cash flows sky rocket in 2020 as people increasingly migrated away from city centers during the ongoing pandemic.
Disclosure: Author owns no stocks mentioned.
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