Martin Whitman is the founder of Third Avenue Management. Whitman stared his career on Wall Street by joining Shearson Hammill & Co as an analyst. Whitman was not interested in the short-term earnings and simple analysis on Wall Street. Whitman believes that underpriced companies can be found among those with strong balance sheets. Whitman was a Distinguished Management Fellow at Yale School of Management. The Whitman School of Management of Syracuse University is also named after him.
Recently Whitman’s Third Avenue announced its latest holdings in a 13F filing. Let’s take a closer look at the most bullish bets of the fund and decide whether it makes sense for investors to imitate these stock picks.
Bank of New York Mellon Corp (BK): BK is one of the large positions in Whitman’s portfolio. At the end of last year, Third Avenue reported owning nearly $200 million worth of BK shares. BK is quite popular among hedge funds. At the end of the third quarter, there were 32 hedge funds with BK positions in their 13F portfolios. Jean-Marie Eveillard’s First Eagle Investment Management had over $300 million invested in BK. Warren Buffett was also bullish about BK. His Berkshire Hathaway reported to own $36 million worth of BK at the end of 2011.
We like BK as well. It offers a decent dividend yield of 2.36%, higher than the 2% for 10-year treasury bonds. The company also has expanding profit margins and reasonable valuations. BK has a forward P/E ratio of 8.80 and its EPS is expected to grow at an average of 13.26% per year over the next five years. So BK’s P/E ratio for 2014 is only 6.86, compared with 7.2 for State Street Corp (STT).
Keycorp (KEY): Whitman also had over $100 million invested in KEY at the end of last year. In addition to Whitman, another thirty-eight hedge fund managers were in favor of KEY too. For instance, Ken Griffin was the most bullish hedge fund manager about KEY. His Citadel Investment Group had $124 million invested in this stock. Cliff Asness, Israel Englander, and Steven Cohen were also bullish about KEY.
We think KEY is an attractive stock. Over the fourth quarter of 2011, the company experienced stronger-than-expected loan growth. Its loan growth was 13% from the fourth quarter of 2010 to the fourth quarter of 2011, versus 4% for the third quarter. We are optimistic about its loan growth in 2012 as the manufacturing sector in the mid-west has rebounded. KEY is also attractively valued. It has a forward P/E ratio of 10.15 and it is expected to grow at 8% annually in the next five years. Therefore, its P/E ratio for 2014 is 8.7. A few other money center banks are also trading at low multiples. For example US Bancorp (USB) has a forward P/E ratio of 10.02 an expected growth rate of 9.79%, which indicates that it has a 2014 P/E ratio of only 8.3.
A few other large positions in Whitman’s portfolio include Brookfield Asset Management (BAM), Forest City Enterprises Inc (FCE), Weyerhaeuser Company (WY), and Covanta Holding Corporation (CVA). These stocks look a bit overvalued though. Their forward P/E ratios are all above 20. Whitman reduced his stakes in these positions slightly over the fourth quarter last year. It may not be a good time to invest in these four stocks right now, but BK and KEY are good options. We expect these two stocks outperform the market over the next 12 months.