Over the course of the weekend, in addition to watching the Orioles take three out of four from the Yankees, I had a chance to read the latest epistle from Third Avenue Value Funds. Although they have struggled a bit of late, when Marty Whitman was running the funds, Third Avenue racked a pretty impressive track record. Mr. Whitman still writes part of the commentary each quarter and his insights and wisdom make the letters a must-read for many value types.
This quarter's was no different, and in addition to his discussion he shared the results of a little statistical test the firm ran recently. They looked at global stocks over the last 10 years and selected issues where the year book-value per share increased by at least 10% per annum for the decade, the common stock was selling at 1x tangible book value or less, and had a market cap of more than $1 billion. They then looked for those best capitalized, with a debt-to-equity ratio of less than 30%. That's not that different form the basic value screens I run on a weekly basis.
Third Avenue found that 90% of the companies had a positive 10-year total return; 55% of the companies in the screen enjoyed, at least double-digit annualized returns, 13% of the stocks in the screen enjoyed 10-year annualized returns in excess of 20%. The largest annualized loss was just 6.7%. This study is not only the latest indication that this price-to-book-value stuff works pretty well, it is also a decent screen worth running.
As with most value screens these days, the resulting list is pretty thin. Using a 10,000+ global stock database I found just 41 stocks that made the grade using Third Avenue's value, growth and balance sheet criteria. Most of them are either mining, insurance or real estate related firms. Many of the real estate firms were related to Hong Kong properties, and I am allergic to all things China-based, so I will just set those aside.
Some of my favorite miners make the list. We have done okay so far with Pan American Silver (PAAS) as we started buying it back in the single digits. Even after moving up about 20% in 2014 the stock trades at just 90% of book value. Management has grown book value by 16% a year for the past decade. The balance sheet is strong, with a debt-to-equity ratio of just 0.17.
Hecla Mining (HL) is on our list as well. Hecla trades at just 70% of book value and has a debt-to- equity ratio of 0.39. The book value has grown by 13% a year on average, and unlike a lot of miners, they have been able to keep book value stable over the past year.
Buenaventura Mining (BVN) has one of the highest growth rates on the list, with an average annual growth in book value of 23%. The Peruvian company explores for gold and silver as well as lead, zinc, and copper. The company has no debt and the stock is currently trading at just 90% of book value.
The screen developed by Third Avenue is just the latest in a series of back tests and screens that verify two things. One is that buying well-capitalized stocks under book value is extremely profitable over time and investors would be wise to favor deep value investing as opposed to the mo-mo and hot stock strategies. Valuation and patience are the key to long term success in the markets not day trading and break out patterns.
The second thing this screen shows us is that miners are cheap right now. Precious metals prices have been weak as traders are much more concerned about deflation that inflation. Industrial and jewelry demand appears to also be slow as a result of the weak global economy. I am not a metals trader and have little to no knowledge of where these markets might go in the short term. They may well go a lot lower before recovering in the future, or could just trade sideways for years. I have no clue.
What I do know is that the companies that mine precious and industrial metals are cheap, and many of them are trading for a fraction of their asset value. At some point in the next decade, conditions in the industry will improve and those companies that can survive long enough to thrive should see their stock price move higher by several multiples of the current price.