Gleaning Wisdom From Third Avenue

 | Sep 09, 2011 | 11:30 AM EDT
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One of the must-read shareholder reports on my list is Third Avenue Management's quarterly portfolio manager commentary. Whether the topic is value investing distressed debt, or his current views of the markets, legendary value investor Marty Whitman, now 86 years old, never fails to deliver in his Letter from the Chairman. This time around, Whitman discusses the U.S. debt situation in his typical direct style. Among other things, he takes aim at the notion of the validity of a balanced budget amendment, and also suggests that higher personal income taxes on the wealthy are not a bad idea, stating "No matter how high my personal income taxes become, I'll always owe the U.S. government more than it owes me." Agree with him or no (and I don't on some of the issues he covers), you still have to respect his opinion.

Whitman also makes the case that the U.S. is still a "good place for long-term investments," due to a variety of factors that include a relative lack of corruption, world's best university system, most efficient distribution system, highly productive workforce, and well developed securities markets to name a few. This section amounts to a pep talk during uncertain times from a legendary investor who has experienced nearly every type of market in his career. This is helpful since so much of the focus these days is on the short term, and fear runs rampant.

Meanwhile, Third Avenue's portfolio managers have been busy for the most part, and I always like to see what names they've been buying or selling. Curtis Jensen, portfolio manager of the Third Avenue Small-Cap Value Fund, added several new positions during the third quarter, including clothing retailer American Eagle Outfitters (AEO), REIT Excel Trust (EXL), specialty vehicle manufacturer Oshkosh (OSK), and cast aluminum wheel manufacturer Superior Industries (SUP). Superior looks interesting right now, with nearly $150 million, or $5.53 in cash, and no debt, the stock trading at 1.03x tangible book value per share, 8x trailing earnings and about 11x 2012 consensus estimates. In addition, the company currently yields 3.9%.

Jensen closed positions in Brookfield Asset Management (BAM) and Sanderson Farms (SAFM), and reduced several positions including Electro Scientific Industries (ESIO), Tejon Ranch (TRC), P.H. Glatfelter (GLT), and Pharmaceutical Product Development (PPDI).

Michael Winer and Jason Wolf, co-portfolio managers of The Third Avenue Real Estate Value Fund, took a new position in Lowes (LOW), which may seem like a curious play for a real estate fund, until you realize that the company owns nearly 90% of its locations. The co-managers believe that it is not out of the realm of possibilities that Lowes might be a candidate for a leverage buyout (LBO), could do a dividend recapitalization, or might do a spinoff of its vast real estate holdings into a real estate investment trust (REIT).

Finally, there was not a great deal of activity with the flagship Third Avenue Value Fund -- in fact, there were no new positions taken, and none closed, which is not an uncommon occurrence in value land. As fellow Real Money contributor Bob Byrne recently told me (somewhat tongue in cheek), "Value investors sleep 18 hours a day." The fund's positions in Tellabs (TLAB) did increase, while those in Brookfield Asset Management and Nabors Industries (NBR) decreased.



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