Martin Whitman‘s Third Avenue Management is one of the funds that outperformed the benchmarks in 2016, having posted returns of 13.39%, compared to the S&P 500’s and MSCI World Index’s gains of 11.96% and 8.15%, respectively. In its fourth-quarter letter to investors, the fund highlighted its investment strategy, one of the key features of which is patience, which “was rewarded in the [fourth] quarter with the top three contributors all being banks.” Third Avenue is still bullish on the banking industry as it thinks that banks will see earnings upside from interest rate hikes, among other factors. In this article, we are going to take a closer look at Third Avenue’s comments involving its investments in two financial companies: Comerica Incorporated (NYSE:CMA) and PNC Financial Services Group Inc (NYSE:PNC), healthcare companies: Brookdale Senior Living, Inc. (NYSE:BKD) and Cerner Corporation (NASDAQ:CERN), as well as Lennar Corporation (NYSE:LEN), a homebuilder in which the fund boosted its stake last quarter.
In its latest 13F filing with the U.S. Securities and Exchange Commission, Third Avenue revealed an equity portfolio worth $2.21 billion, with the top 10 holdings amassing nearly half of the value. During the fourth quarter, the fund acquired eight new holdings and closed four positions.
Martin Whitman of Third Avenue Management
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As stated earlier, Third Avenue is bullish on banks, particularly regional banks and its positions in Comerica Incorporated (NYSE:CMA) and PNC Financial Services Group Inc (NYSE:PNC) were the top performers in its portfolio according to the letter. In its latest 13F, Third Avenue reported holding 1.04 million shares of Comerica, down by 32% over the quarter; the value of the stake amounted to $70.67 million at the end of December. In PNC Financial Services Group Inc (NYSE:PNC) it inched down its stake by some 3,000 shares to 632,300 shares worth $73.95 million. Third Avenue considers that Comerica Incorporated (NYSE:CMA) and (“to a lesser extent”) PNC should benefit from increasing oil prices, which should improve their credit quality and lending.
“The regional and trust banks should be a major beneficiary of Trump Administration policies. Assuming these policiesare enacted, there should be lessregulation,allowing for a more efficient use of the banks’ balance sheets and the ability to return more of the banks’ excess capital to shareholders. Any increase in infrastructure spending should drive increased loan demand,” the letter added.
In addition, due to the fact that regional banks generate their income only in the U.S., they should also benefit from cuts in corporate taxes. The rollback in regulations could also lead to an increase in M&A activity and Third Avenue sees Comerica Incorporated (NYSE:CMA) as a “key target”.
Third Avenue is not the only fund to be bullish on the banking industry, as many banking stocks gained popularity among the funds we track at Insider Monkey, with three of the top 10 most popular companies being banks. Comerica Incorporated (NYSE:CMA) and PNC Financial Services Group Inc (NYSE:PNC) ranked further down the list, with 50 funds holding around 5.40% of PNC Financial Services’ stock and 43 funds reporting long positions in Comerica, which represented roughly 11.40% of its float.
As Brookdale Senior Living, Inc. (NYSE:BKD)‘s stock dropped by over 29% during the fourth quarter, it was the top detractor in Third Avenue’s equity portfolio. The fund held 2.02 million shares worth $25.14 million at the end of December, down by 15% over the quarter. Its stock plunged mainly on the back of the company posting weaker-than-expected third-quarter results and cutting guidance. However, Third Avenue remains bullish on the company as it sees the real estate value of the company higher than its enterprise value. Earlier this year there have been reports that first Blackstone and later Ventas were interested in acquiring Brookdale Senior Living, Inc. (NYSE:BKD). At the end of 2016, 32 funds tracked by us held around 35% of Brookdale Senior Living, Inc. (NYSE:BKD)’s outstanding stock, down by three funds over the quarter.
Cerner Corporation (NASDAQ:CERN) represented a new position in Third Avenue’s equity portfolio, as the fund disclosed ownership of 408,707 shares worth $19.36 million in its latest 13F filing. The fund acquired shares as it expects the healthcare technology industry to expand following an increase of spending by hospitals that are in need of IT solutions. As more hospitals require electronic systems to hold records and monitor outcomes, Cerner Corporation (NASDAQ:CERN) should benefit from its leading position in the market, as well as from industry consolidation.
“While uncertainty remains regarding the ultimate resolution of the ACA, we believe the benefit of increased efficiencies that enhanced IT systems provide, along with increasing use cases, e.g., population health, will continue to bode well for Cerner’s business, enabling the company to grow and compound value over the longer-term,” Third Avenue said.
A total of 24 funds from our database amassed around $1.03 billion worth of Cerner Corporation (NASDAQ:CERN)’s stock heading into 2017.
In Lennar Corporation (NYSE:LEN), the fund held 2.95 million shares at the end of December, up by 1.97 million shares over the quarter; the value of the position was worth $126.73 million. The fund praised the company’s strong balance sheet and its efforts to develop its land bank into saleable housing units, among other things.
“Perhaps Lennar’s most exciting aspect is the strength of the investment case and current undervaluation taken without the likely strong tailwind of an improving housing cycle,” the fund added.
Though the number of investors tracked by us long Lennar Corporation (NYSE:LEN) remained unchanged at 48 during the fourth quarter, the total value of their holdings surged to $1.56 billion from $1.13 billion and represented around 16% of the company’s stock.
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