Curtis Jensen, manager of Third Avenue Small-Cap Value, says a safe business is one that possesses a rock-solid balance sheet and the fortitude to weather unforgiving financial markets and rocky economic times.
A cheap stock, Jensen continues, is one that sells for at least a 30 percent to 40 percent discount from a company's intrinsic value, which he describes as the price a "reasonable, knowledgeable businessperson" would pay for the firm in an arm's-length transaction. If you succeed in identifying safe companies selling at cheap prices, then you are minimizing investment risk.
Small-Cap Value recently reopened to new investors. Under Jensen's leadership, the fund (symbol TASCX) returned an annualized 11 percent over the past decade, beating the Russell 2000 small-company index of stocks by an average of four percentage points per year.
What stocks does Jensen like? One is Imation (IMN), the world's leading supplier of removable data-storage products. A relatively old technology company, Imation, based in Oakdale, Minn., was part of 3M before it was spun off in 1996.
Jensen is impressed by the way Imation is remaking and expanding its business. The company is redeploying robust cash flows from its mature enterprise business, which sells to other concerns, to consumer businesses with greater growth potential. Over the past two years, Imation has acquired three consumer brands: Memorex, Memcorp and TDK's recording-media business. Shares of Imation, which has more than $100 million in cash on its balance sheet, recently traded at $20, or 12 times estimated 2008 earnings of $1.64 per share.
In Vail Resorts (MTN), Jensen spots a hard-to-replicate collection of assets sheltered by tall barriers to entry. Vail is a leading ski-resort company, with marquee properties that include slopes in Vail, Beaver Creek and Breckenridge, Colo. The stock recently traded at $35, or 14 times estimated earnings of $2.46 per share for the fiscal year ending July 31, 2009.
Since Jensen first invested in Brookfield Asset Management (BAM) in 2001, shares of the Toronto-based asset manager have vaulted sevenfold. What attracted Jensen and other Third Avenue managers to Brookfield was their glowing assessment of Brookfield's chief executive, Bruce Flatt (Third Avenue funds, collectively, own more of Brookfield than any other mutual fund complex).Flatt, 42, is a bit like a young Warren Buffett. He has a flair for capital allocation and value creation. Through acquisitions and internal growth, he has built Brookfield into a global asset manager focused on property, power, infrastructure and money management. Assets under management have climbed 250 percent, to $95 billion, over the past three years, helping Brookfield generate a rich return on equity (a measure of profitability) in excess of 30 percent.
Andrew Tanzer is a senior associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to [email protected].