The Third Avenue Value Fund (Trades, Portfolio), part of the late Martin Whitman’s Third Avenue Management (Trades, Portfolio), disclosed it established one new position and exited four others when it released its first-quarter 2019 portfolio.
Managed by Matthew Fine and Michael Fineman, the New York-based firm’s flagship fund invests in a variety of undervalued securities in a number of industries, regions and market capitalizations. The portfolio managers seek opportunities in companies that are not only trading below intrinsic value, but compound asset value at double-digit rates.
Based on these criteria, the fund gained a position in Transocean Ltd. (XSWX:RIGN, Financial) during the quarter when the company acquired Ocean Rig UDW Inc. (ORIG, Financial) and divested Total SA (XPAR:FP, Financial), Bank of New York Mellon Corp. (BK, Financial) and White Mountains Insurance Group Ltd. (WTM, Financial).
Transocean
The fund picked up 1.4 million shares of Transocean as a result of its acquisition of Ocean Rig, dedicating 1.56% of the equity portfolio to the stake. Shares averaged around 8.65 Swiss francs ($8.66) during the quarter.
The Swiss offshore drilling contractor has a market cap of 5.63 billion francs; its shares closed at 9.13 francs on Monday with a price-book ratio of 0.36 and a price-sales ratio of 1.43.
The median price-sales chart shows the stock is trading below its historical value, suggesting it is undervalued.
Weighed down by poor interest coverage and declining revenue per share, GuruFocus rated Transocean’s financial strength 4 out of 10. In addition, the Altman Z-Score of 0.34 suggests the company could possibly go bankrupt.
The company’s profitability and growth scored a 5 out of 10 rating. Despite having margins and returns that underperform competitors, the Piotroski F-Score of 5 indicates the company has stable operating conditions. Transocean also has a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.
Third Avenue holds 0.23% of the company’s outstanding shares.
Ocean Rig
The fund divested its 873,012-share holding of Ocean Rig as a result of the cash-and-stock merger with Transocean, which closed in December. The trade had an impact of -3% on the equity portfolio. According to GuruFocus, Third Avenue gained approximately 9.4% on the investment since establishing it in second-quarter 2018.
Based in the Cayman Islands, the company operated a fleet of semi-submersible oil platforms and underwater drillships. According to the terms of the agreement, shareholders of Ocean Rig received 1.6128 shares of Transocean and $12.75 in cash per share owned.
Other gurus who may have benefited from the deal include Lee Ainslie (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Paul Singer (Trades, Portfolio).
Total
In its largest trade of the quarter, Third Avenue sold its remaining 471,560 shares of Total for an average price of 48.05 euros ($53.82) per share, impacting the equity portfolio by -3.14%. GuruFocus estimates the fund gained 13% on the investment since establishing it in the third quarter of 2013.
The French integrated oil and gas company has a market cap of 130.03 billion euros; its shares closed at 5 euros on Monday with a price-earnings ratio of 13.89, a price-book ratio of 1.28 and a price-sales ratio of 0.85.
According to the Peter Lynch chart, the stock is undervalued since it is trading below its fair value.
Total’s financial strength and profitability and growth were both rated 6 out of 10 by GuruFocus. Although it has comfortable interest coverage, the Altman Z-Score of 1.66 warns the company is at risk of going bankrupt since it has seen a decline in revenue per share over the last five years.
The company is also supported by an expanding operating margin, moderately strong returns that outperform at least 51% of industry peers and a strong Piotroski F-Score of 8, which indicates business conditions are healthy. Total also has a one-star business predictability rank.
The Tweedy Browne (Trades, Portfolio) Global Value Fund is the company’s largest guru shareholder with 0.18% of outstanding shares.
Bank of New York Mellon
The Value Fund shed its 518,848 remaining shares of Bank of New York Mellon for an average price of $48.97 per share, impacting the equity portfolio by -2.78%. GuruFocus data shows the fund made an estimated gain of 39% on the investment since the first quarter of 2010.
The New York-based investment bank has a $49.14 billion market cap; its shares were trading around $51.44 on Tuesday with a price-earnings ratio of 12.05, a price-book ratio of 1.33 and a price-sales ratio of 3.24.
Based on the Peter Lynch chart, the stock appears to be undervalued.
BNY Mellon’s financial strength and profitability and growth were both rated 4 out of 10 by GuruFocus. Despite issuing approximately $12.6 billion in new long-term debt over the last three years, the company has a decent cash-debt ratio of 2.85.
The bank is also supported by a net margin and return on equity that outperform competitors as well as a one-star business predictability rank.
Of the gurus invested in BNY Mellon, Warren Buffett (Trades, Portfolio) has the largest stake with 8.48% of outstanding shares. Other top guru shareholders include Dodge & Cox, First Eagle Investment (Trades, Portfolio), Chris Davis (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Bill Nygren (Trades, Portfolio), Tweedy Browne (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Yacktman Asset Management (Trades, Portfolio).
White Mountains Insurance
Third Avenue sold 26,727 shares of White Mountains Insurance for an average price of $887.98 per share. The trade had an impact of -2.69% on the equity portfolio. GuruFocus estimates the fund has gained 51% on the investment since second-quarter 2012.
The insurance company, which is headquartered in Bermuda, has a $2.93 billion market cap; its shares were trading around $924.11 on Tuesday with a price-book ratio of 1.02 and a price-sales ratio of 8.29.
The median price-sales chart shows the stock is trading above its historical value.
GuruFocus rated White Mountains’ financial strength 5 out of 10 as a result of low cash-debt and debt-to-equity ratios.
The company’s profitability and growth fared even worse, scoring a 1 out of 10 rating as a result of negative margins and returns. The one-star business predictability rank is on watch as a result of declining revenue per share.
With 0.48% of outstanding shares, Jim Simons (Trades, Portfolio)’ Renaissance Technologies is the company’s largest guru shareholder. Hotchkis & Wiley, Chuck Royce (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) also have positions in the stock.
Additional trades
During the quarter, the fund also reduced its holdings of Brookfield Asset Management Inc. (TSX:BAM.A, Financial), CK Hutchison Holdings Ltd. (HKSE:00001, Financial), Lennar Corp. (LEN) and Beyerische Motoren Werke AG (XTER:BMW) as well as expanded several other positions, including Hawaiian Holdings Inc. (HA) and Daimler AG (XTER:DAI).
Third Avenue’s $775.89 million equity portfolio, which is composed of 28 stocks, is heavily invested in the basic materials sector. According to its fact sheet, the Value Fund posted a -20.84% return in 2018, underperforming the MSCI World Index’s return of -8.24%.
Disclosure: No positions.
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