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Martin Whitman’s Third Avenue Bullish on Regional Banks, Healthcare IT in 2017

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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.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively the most bullish on. Over the past year, this strategy generated returns of 39.7%, topping the 24.1% gain registered by S&P 500 ETFs. Insider Monkey’s enhanced small-cap strategy registered gains of more than 45% over the last 12 months and outperformed SPY by more than 30 percentage points in the last 4.5 years (see more details).

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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.

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