Third Avenue Management (Trades, Portfolio) recently disclosed its portfolio updates for the fourth quarter of 2019.
Founded in 1986 by Martin J. Whitman, Third Avenue pursues a deep-value investing strategy based on the prices, balance sheets and assets of businesses. It aims to follow the crowd as little as possible, focusing on the long-term values of investments rather than the short-term effects of news reports or investor sentiment.
Based on the above criteria, Third Avenue Management established a new position in The Howard Hughes Corp. (HHC, Financial) during the quarter and sold out of its positions in Lowe’s Companies Inc. (LOW, Financial) and Tejon Ranch Co. (TRC, Financial). It also bought shares of the SPDR S&P 500 ETF Trust (SPY, Financial).
The Howard Hughes Corp.
After selling out of a previous position in Howard Hughes in the second quarter of 2016, the firm established a new holding in the company of 112,780 shares. The trade had a 1.41% impact on the equity portfolio. Shares traded at an average price of $116.27 during the quarter.
Howard Hughes is a Texas-based real estate development and management company that has its origins in the oil drilling tool business in Dallas. Soon after its founding, the company diversified into real estate, which now accounts for the majority of operations.
On Feb. 24, Howard Hughes shares traded around $126.05 for a market cap of $5.44 billion and a price-earnings ratio of 48.43. The company has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 6 out of 10.
The interest coverage of 1.78% and Altman Z-score of 1.12 indicate that the company may encounter difficulty in meeting its long-term financial obligations. On the other hand, the cash-debt ratio of 0.19 and current ratio of 2.24 suggest it can easily pay off short-term creditors.
The return on capital of 484.72% and three-year revenue growth rate of 9.7% are outperforming 61.67% of competitors. However, net income has declined in recent years.
In October of 2019, Howard Hughes completed a comprehensive review of its assets and decided to enact a transformation plan. It aims to sell approximately $2 billion in non-core assets and cut costs by $50 million. Effective as of the announcement, Paul Layne became the new CEO, and both David Weinreb (former CEO) and Grant Herlitz (former company president) stepped down from the company. These changes may be able to provide the company a profitability boost until income from its MPC (master planned communities) town centers can build up.
Lowe's Companies Inc.
Third Avenue Management sold out of its 217,258-share holding in Lowe’s, impacting the equity portfolio by -2.16%. Shares of the company were trading at an average price of $114.57 during the quarter. GuruFocus calculations indicate that the investment returned a total estimated gain of 174.37% to the firm.
Lowe’s is a home improvement retailer based in Mooresville, North Carolina. It sells various products for do-it-yourself home improvement, such as appliances, windows, countertops and flooring.
On Feb. 24, shares of Lowe’s traded around $122.81 for a market cap of $93.85 billion and a price-earnings ratio of 32.33. GuruFocus has assigned the company a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10.
Lowe’s has a cash-debt ratio of 0.04, which is lower than 89.69% of competitors. The current ratio of 1.04 also indicates that the company may have trouble with its short-term financial obligations, though the Altman Z-score of 3.84 suggests more stability for repaying long-term creditors.
The company has a return on capital of 22.55% and an operating margin of 6.67%. Revenue has seen steady growth, though net income has remained low.
Compared to its main rival Home Depot (HD), Lowe’s has managed to keep pace in terms of overall growth. While Lowe’s has seen continued success with its professional contractor niche, its online sales are lagging Home Depot’s significantly, growing only 11% year over year in 2019 compared to Home Depot’s 24%. The retailer will need to improve its omnichannel offerings, including online, delivery and logistics, if it doesn’t want to fall behind its chief rival.
Tejon Ranch Co.
The firm also sold its remaining 686,108 shares of Tejon Ranch, impacting the equity portfolio by -1.05%. During the quarter, shares of the company traded at an average price of $16.32. According to GuruFocus calculations, the investment returned a total estimated gain of approximately 14.86% to the firm.
Tejon Ranch is one of the largest owners of private land in the state of California. Its holdings include planned communities, commercial real estate and land used for agricultural or mining purposes.
On Feb. 24, Tejon Ranch shares traded around $16.24 apiece for a market cap of $423.81 million and a price-earnings ratio of 325.4. The company has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 4 out of 10.
The cash-debt ratio of 0.83 and Altman Z-score of 2.99 indicate long-term financial stability, while the current ratio of 3.63 indicates short-term financial stability. However, the per-share ratio of debt to revenue is 1.65, which is a bit high.
The return on capital of -12.15% is underperforming 78.76% of competitors. Revenue and net income have been in decline for the past few years, though 2019 was a better year.
In addition to real estate and agriculture, Tejon Ranch also leases its land to operators for exploration and production of oil, natural gas and limestone. The company may thus see headwinds in the future as the energy sector struggles with low oil and gas prices. Its consideration of possibly scaling up the solar facilities on its properties may pose a capital expenditure headwind in the early stages.
SPDR S&P 500 ETF Trust
The firm bought 3,365 shares of the SPDR S&P 500 ETF Trust, which had a 0.11% impact on the equity portfolio. Shares of the exchange-traded fund sold at an average price of $308.48 apiece for the quarter.
Portfolio overview
As of the quarter’s end, Third Avenue Management’s equity portfolio consisted of 57 stocks valued at $1.01 billion. Its top holdings were Five Point Holdings LLC (FPH) with 8.05% of the equity portfolio, Weyerhaeuser Co. (WY) with 7.9% and Brookfield Asset Management Inc. (BAM) with 6.15%.
The turnover rate was 3%. In terms of sector weighting, the firm was most invested in real estate (43.07%), followed by financial services (16.19%) and consumer cyclical (14.27%).
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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