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Third Avenue Value Fund Buys 3 Stocks, Sells 1 in 2nd Quarter

GuruFocus.com

The Third Avenue Value Fund (Trades, Portfolio) released its second-quarter portfolio earlier this week, disclosing that it established three new positions and sold out of one holding.


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 manager Matthew Fine uses 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 Old Republic International Corp. (NYSE:ORI), Vornado Realty Trust (NYSE:VNO) and FedEx Corp. (NYSE:FDX) during the quarter. It also divested of its stake in Borr Drilling Ltd. (OSL:BDRILL).

Old Republic International

Third Avenue invested in 777,663 shares of Old Republic, allocating 3.45% of the equity portfolio to the holding. The stock traded for an average price of $18.33 per share during the quarter.

The Chicago-based insurance company has a $4.96 billion market cap; its shares were trading around $16.31 on Wednesday with a price-earnings ratio of 135.92, a price-book ratio of 0.95 and a price-sales ratio of 0.81.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 4 out of 10 also supports this analysis.

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GuruFocus rated Old Republic's financial strength 3 out of 10. Due to the fact its assets are building up at a faster rate than revenue is growing, the company may be becoming less efficient. In addition, the weighted average cost of capital significantly outperforms the return on invested capital, indicating it spends more money than it makes.

The company's profitability did not fare much better, scoring a 4 out of 10 rating on the back of margins and returns that underperform a majority of competitors. The predictability rank of one out of five is also on watch as a result of revenue per share declining over the past year. According to GuruFocus, companies with this rank typically return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Old Republic, Jim Simons (Trades, Portfolio)' Renaissance Technologies has the largest stake with 1.22% of outstanding shares. Other top guru shareholders include Pioneer Investments (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).

Vornado Realty Trust

The fund picked up 258,031 shares of Vornado Realty, dedicating 3.14% of the equity portfolio to the position. Shares traded for an average price of $48.06 each during the quarter.

The real estate investment trust, which is headquartered in New York, has a market cap of $7.3 billion; its shares were trading around $38.21 on Wednesday with a price-earnings ratio of 2.5, a price-book ratio of 1.23 and a price-sales ratio of 3.98.

According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 also leans toward undervaluation.

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Vornado's financial strength was rated 4 out of 10 by GuruFocus on the back of poor interest coverage and a low Altman Z-Score of 1.11, which warns it could be in danger of going bankrupt. Since the WACC outperforms the ROIC, it also might have poor profitability potential.

The REIT's profitability fared better with a 6 out of 10 rating. While the operating margin is in decline, the company's returns outperform a majority of industry peers. Vornado is also supported by a moderate Piotroski F-Score of 5, which suggests business conditions are stable. Despite recording a decline in revenue per share over the past five years, the company still has a one-star predictability rank.

With a 0.9% stake, Paul Singer (Trades, Portfolio) is Vornado's largest guru shareholder. Other gurus invested in the stock are Chris Davis (Trades, Portfolio), Michael Price (Trades, Portfolio), Pioneer, Hotchkis & Wiley, Grantham, Gabelli, Steven Cohen (Trades, Portfolio), Caxton and Greenblatt.

FedEx

The Value Fund purchased 67,993 shares of FedEx, giving it 2.39% space in the equity portfolio. The stock traded for an average per-share price of $130.10 during the quarter.

The Memphis, Tennessee-based courier and logistics company has a $36.63 billion market cap; its shares were trading around $140.22 on Wednesday with a price-book ratio of 2.22 and a price-sales ratio of 0.62.

Based on the median price-sales chart, the stock appears to be undervalued, an assessment which the GuruFocus valuation rank of 6 out of 10 aligns with.

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GuruFocus rated FedEx's financial strength 4 out of 10. Although the company has issued approximately $3.8 billion in new long-term debt over the past three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 1.97, however, indicates the company is under some pressure since. The ROIC is also less than the WACC, which suggests poor profitability.

The company's profitability scored a 7 out of 10 rating, driven by an expanding operating margin. FedEx is being weighed down, however, by negative returns that underperform a majority of competitors as well as a low Piotroski F-Score of 3, which implies business condition are in poor shape. As a result of a slowdown in revenue per share growth over the past year, the company's one-star predictability rank is on watch.

Dodge & Cox is the company's largest guru shareholder with a 10.31% stake. PRIMECAP Management (Trades, Portfolio), Bill Gates (Trades, Portfolio)' foundation trust, Mason Hawkins (Trades, Portfolio), Hotchkis & Wiley, Sarah Ketterer (Trades, Portfolio), the Parnassus Endeavor Fund (Trades, Portfolio), Pioneer, Bill Nygren (Trades, Portfolio), Brandes and many other gurus also own the stock.

Borr Drilling

The fund divested of its 1.8 million-share stake in Borr Drilling, impacting the equity portfolio by -1.89%. During the quarter, the stock traded for an average price of 17.25 krone ($1.81) per share.

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GuruFocus estimates Third Avenue lost 88.62% on the investment.

The offshore drilling contractor, which operates in Norway but is headquartered in Bermuda, has a market cap of 1.66 billion krone; its shares were trading around 10.6 krone on Wednesday with a price-book ratio of 0.1 and a price-sales ratio of 0.32.

The median price-sales chart suggests the stock is overvalued.

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Weighed down by $6.4 billion in new long-term debt, Borr's financial strength was rated 2 out of 10 by GuruFocus. The Altman Z-Score of -0.32 also warns that the company could be in danger of bankruptcy.

The company's profitability scored a 1 out of 10 rating on the back of negative margins and returns that underperform a majority of industry peers. Borr also has a moderate Piotroski F-Score of 4.

No gurus currently own the stock.

Additional trades and portfolio performance

Other significant trades the Value Fund made during the quarter included reductions to the Lennar Corp. (NYSE:LEN.B) and Bayerische Motoren Werke AG (XTER:BMW) positions and additions to the Eagle Materials Inc. (NYSE:EXP) and Mohawk Industries Inc. (NYSE:MHK) holdings.

Third Avenue's $360 million equity portfolio, which is composed of 29 stocks, is largely invested in the basic materials sector, followed by smaller positions in the industrial and consumer cyclical spaces.

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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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This article first appeared on GuruFocus.