Third Avenue Management (Trades, Portfolio)’s flagship fund, the Third Avenue Value Fund, is led by Chip Rewey and remains dedicated to its principles in value investing after founder Martin Whitman (Trades, Portfolio) stepped down from portfolio management in 2012.
Year to date, the fund is up 0.04% through March 29. During the first quarter of fiscal 2016 ended Jan. 31, the fund added two new holdings to the portfolio.
The fund purchased 229,973 shares of Harman International Industries (HAR, Financial) for an average price of $79.12 per share. The company designs products for automakers such as audio systems, visual products and connected services with well-known brands including JBL and Harman/Kardon.
The stock struggled over the past year, declining 38% to trade at 18x earnings. EPS for the second quarter 2016 ended Dec. 31 was $1.55, down from $1.65 in the year-ago quarter. EPS for the full year 2015 was $4.84, a strong improvement from $3.36 in 2014.
Its declining price may be due to concerns that the current auto cycle is reaching its peak, the fund wrote in its first quarter commentary. The managers wrote, however, that they see revenue growth as more secular than cyclical, as Harman is growing adoption of its technology in mid to low-range vehicles such as GM (GM, Financial), Fiat Chrysler (FCAM, Financial), Hyundai and Geely in China.
Net sales increased 12% year over year during the second quarter. Lifestyle Audio net sales were up 20% with new products and the acquisition of Bang & Olufsen Automotive. Third Avenue said Harman met all three tenets of its investing philosophy.
“At our average purchase cost of $77, Harman offers over 30% upside to our mid-case NAV of $100, and as such we look to continue to build the position size opportunistically on market weakness,” the managers wrote.
Third Avenue also purchased 114,465 shares of Ralph Lauren (RL, Financial), which traded for an average $98.17 during the quarter. GuruFocus rates Ralph Lauren’s business predictability at a perfect 5 stars, but the stock has declined 26% over the past year.
Still, the fund called the company one of the “crown jewels in retail,” as it is well-capitalized with a net cash balance sheet and has earned a premium valuation.
The retail company faces several macro risks due to the economic slowdown, including a strong U.S. dollar that has impacted margins and made travel to the U.S. more expensive. The declining price, however, is a case of investor short-termism, Third Avenue said. Another catalyst is new CEO Stephan Larsson, who held posts at H&M and Old Navy.
“In summary, we feel that the favorable long-term prospects heavily outweigh the near-term concerns embedded in RL’s current valuation,” the fund wrote in the commentary. “Higher sales, a weaker USD and lower GRP costs can all contribute to a brighter outlook for RL’s operations.”
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