Highlights From Third Avenue’s Investor Letters

Third Avenue Management is a New York-based investment fund that uses a deep value investing strategy for stock selection. The fund was founded by Martin Whitman and has been in the investment business since 1974. In its July newsletter, Third Avenue said that its focus is on the micro and not on the macro, since the latter is unpredictable in nature. The letter cites the example of the Brexit, which was totally unexpected and resulted in more quantitative easing by global central banks and further deferred an interest rate increase by the Federal Reserve.

The Fund used the volatility created by the Brexit to establish positions in two new stocks, Amgen Inc (NASDAQ:AMGN) and LivaNova Plc (NASDAQ:LIVN). It also closed out its position in internet security leader Symantec Corporation (NASDAQ:SYMC) after earning a cumulative IRR of more than 54% on the stock.

Having already covered the fund’s small-cap investor letter, in this article we’ll go through the funds other recent investor letters and share its thoughts on five stocks.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

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Amgen Inc (NASDAQ:AMGN) is one of the world’s biggest biotech companies, and has a diversified product portfolio spread across six healthcare segments. It is a large company with stable operating cash flows of more than $9 billion a year and returns a large portion of its cash to shareholders. Amgen Inc (NASDAQ:AMGN) has sharply improved its margins from 38% in 2013 to 55% in the first quarter of 2016, after reducing $1.5 billion in annual costs through a transformation program. While Third Avenue thinks that Amgen faces competitive threats, particularly from bio similar drugs launched by other companies, it is of the opinion that the risk is already priced into the stock and that Amgen has upside potential if its pipeline of 31 products leads to some blockbusters in the future. As per our database, 58 hedge funds held Amgen shares worth $2.09 billion at the end of June.

LivaNova Plc (NASDAQ:LIVN) is the company that was formed after the merger of Sorin and Cyberonics. Third Avenue thinks that there is significant opportunity in the company because of potential investor neglect concerning the new name. The $3 billion company has a leading position in cardiac surgical equipment, surgical health valve replacement, neuromodulation, and cardiac rhythm management. It is the number-one player in a number of these segments and is gaining market share in developed markets. The merger of the two companies was also expected to result in $80 million in cost synergies of which only $19 million has been realized. Third Avenue also believes that LivaNova has strong R&D capabilities and is pursuing ground-breaking research in three new areas which could have market potential of more than $1 billion each. The fund states that the stock trades at a strong discount to its US-based peers and offers downside protection for this reason. The number of hedge funds from within our database holding a position in LivaNova declined to 20 from 23 during the June quarter. Those 20 funds still held 16% of LivaNova Plc (NASDAQ:LIVN)’s float as of June 30.

We’ll check out Third Avenue’s thoughts on three other companies on the next page.

Weyerhaeuser Co. (NYSE:WY) is a Real Estate Investment Trust (REIT), with its principal line of business being ownership of more than 7 million acres of timberland in the U.S. and Canada. Weyerhaeuser was the fund’s largest position at the end of June and continues to perform well following its merger with Plum Creek. Third Avenue thinks that the strength in the housing and real estate markets bodes well for the stock in the near-to-medium-term. Weyerhaeuser Co. (NYSE:WY) is led by strong management and has made a number of cost reduction initiatives in the recent past. Third Avenue thinks that the REIT has strong potential for its wood products in the future and thinks that Weyerhaeuser Co. (NYSE:WY) is one of the best investments in the global real estate market. About 30 hedge funds in our database held more than 7% of the company’s outstanding stock as of June 30.

Rayonier Inc. (NYSE:RYN) is another timberland REIT in which Third Avenue has a large position. Similar to Weyerhauser, Rayonier has extensive holdings of timberland in the U.S. and New Zealand. The company owns, leases and manages over 2.7 million acres of timberland located in the Southern United States (over 1.9 million acres), the Pacific Northwest (over 372,000 acres) and New Zealand (over 439,000 gross acres). Third Avenue held more than $101.9 million in Rayonier shares on June 30, making it one of the fund’s largest holdings. Rayonier Inc. (NYSE:RYN) has done well over the past year, returning over 17% and considerably outperforming the broader S&P 500 index. The $3.2 billion REIT also provides a solid dividend yield of more than 3.7%. While the number of hedge funds in our system long Rayonier Inc. (NYSE:RYN) declined to ten as of June 30 from 12 a quarter earlier, the value of their holdings increased to $362 million from $343 million during that time.

Lennar Corporation (NYSE:LEN) is one of the largest homebuilders in the U.S. and one which Third Avenue is bullish on, owning more than $49 million of Lennar shares at the end of June. Lennar Corporation (NYSE:LEN) operates in four segments – Homebuilding Operations, Financial Services, Rialto, and Multifamily Operations. While its stock performance has not been good over the past year, with the stock declining by around 20%, its valuation is attractive, with a P/E of less than 11-times. Out of the 18 analysts who cover the stock, seven rate it as a ‘buy’, while none have a ‘sell’ rating on it. Lennar Corporation (NYSE:LEN) recently bought WCI Communities in a deal worth $643 million. As of June 30, 40 hedge funds from within our database held long positions in the stock, with an aggregate value of $1.19 billion.

Disclosure: None