A top-1% fund manager over the past 3 years highlights a ‘once-in-a-generation’ opportunity in an underrated part of the market — and shares 10 stocks to buy now

  • Through all the wild market swings of the past five years, Matthew Fine’s fund has risen.
  • Focusing on small caps and international companies has led to his outperformance.
  • Here are 10 top stocks worth investing in right now, in Fine’s view.

By tuning out market noise, leading fund manager Matthew Fine has outperformed.

According to Morningstar, the 23-year market veteran has led the Third Avenue Value Fund (TAVFX) to positive returns for five consecutive years, including a top-1% finish in 2022. In the last three years, he has outperformed 99% of his peers in the global small- to mid-cap space.

Although Fine is more concerned with his carefully crafted investing strategy than with predicting what will happen to stocks and the economy, he can’t help but be surprised by how 2023 has so far unfolded. Despite the S&P 500’s worst year since 2008, the index is on track for another positive year and commands a historically high earnings multiple — despite falling profits.

Stocks fell in early August, and some analysts believe the downturn is just getting started. While Fine is not a trader, he recently told Insider that investors should diversify away from large US growth stocks, particularly if this is an extended bear-market rally.

“Every major correction in US equity markets that we’ve experienced over many, many decades — and I’m talking about 80, 90, 100 years — has had significant rallies,” Fine told Insider.

“When the TMT (technology, media, and telecommunications) bubble burst from March of 2000 over 30 months, the Nasdaq ended up being down about 80% but had several rallies of 30% or stronger,” the fund manager continued. So this happens all the time — it’s just a fact of life. So it’s not surprising on that level.”

Small caps can springboard higher after a dismal stretch

Shares of large-cap companies have outperformed their smaller peers over the last decade, resulting in a startlingly large valuation gap between the two groups, according to Fine.

“I try not to make hyperbolic statements very often, but it really does look [like] a once-in-a-generation type of distortion to me,” Fine said of the small caps.

“The valuation of US small caps in aggregate is so far disconnected from large capitalization companies,” he added, “that it’s incredibly difficult for me to believe that if you take a three- to five-year view, the prospects for small caps are not materially better than for large caps.”

A valuation disparity this large between large and small firms occurs only every few decades, according to Fine. In a mid-year letter to shareholders, he stated that the price-to-earnings (P/E) ratio difference between the S&P 500 and the small-cap-focused S&P 600 indexes is the largest since the early 2000s. According to the fund manager, what followed was a dominant stretch for small caps.

10 top stocks to buy now

Aside from small caps, Fine stated that he is now particularly bullish on stocks in international markets.

“We’re seeing far more opportunities outside of the United States that we believe to be materially undervalued than we are seeing in the United States,” Fine said.

Commodity-related companies, European banks, and Japanese equities, which are experiencing a long-awaited revival, have all piqued the fund manager’s interest. He estimated that 70% of his fund is invested in foreign stocks, 20% in US stocks, and 10% in cash.

Here are Fine’s top ten stocks to buy right now, along with their ticker, market capitalization, P/E ratio, and thesis. His fund’s top holdings are listed separately on its website.

1. Warrior Met Coal

Ticker: HCC

Market cap: $2B

P/E ratio: 2.9x

Thesis: This coal company trades at a dirt-cheap valuation, owing in large part to the industry it belongs to, which makes many investors nervous.

“Coal is obviously the public enemy No. 1 within that natural resources space,” Fine said.

Warrior Met Coal, on the other hand, Fine believes is misunderstood, which is why it is his fund’s largest holding. Not all coal companies are created equal, he said, noting that Warrior only burns metallurgical coal, which is required for steel production. Unlike thermal coal, which is used to generate electricity, met coal is less harmful to the environment and thus will not suffer from a long-term decline.

“In addition to not being in secular decline, a very good reason to own it today is that it’s trading at 3x earnings after being a star performer,” Fine explained.

2. Tidewater

Ticker: TDW

Market cap: $3.3B

P/E ratio: 36.4x (forward)

Thesis: Tidewater has long been a favorite of Fine’s in the oilfield services industry. He purchased it after the company emerged from bankruptcy in 2017 with a net cash position and at cyclical lows, and its shares have increased significantly since then, primarily since late 2022.

However, as his third-largest holding, the fund manager sees plenty of upside in the stock.

3. Valaris

Ticker: VAL

Market cap: $5.8B

P/E ratio: 22.2x

Thesis: Fine believes that, like Tidewater, this offshore drilling firm went through debt restructuring in bankruptcy and emerged stronger. He claims that Valaris now has a sizable, enviable drilling fleet in an industry that is suffering from a lack of investment due to the perception that it is declining.

“The assets in the industries are much smaller,” Fine said. “Now that spending is returning very sharply [in] offshore and offshore oil and gas, the number of assets on which spending can be deployed has shrunk, and the market has tightened very quickly.” And rental rates for that equipment are rapidly rising today.”

4. Bank of Ireland

Ticker: BKRIF

Market cap: $10.8B

P/E ratio: 11.3x

Thesis: Bank of Ireland is one of two European financial institutions on which Fine is bullish. When compared to US stocks in general, including banks, the group trades at a significant discount, though Fine claims this is not due to low-quality companies.

“They’re extremely well-financed, and operating performance is improving significantly as European interest rates rise in lockstep with US interest rates,” Fine said.

5. Deutsche Bank

Ticker: DB

Market cap: $22.4B

P/E ratio: 4.4x

Thesis: Fine’s thesis for Deutsche Bank and Bank of Ireland are identical.

6. Seven and i Holdings

Ticker: SVNDY

Market cap: $35.8B

P/E ratio: 19.5x

Thesis: The Third Avenue Value Fund includes three Japanese stocks, including this retailer. While a dramatic activist campaign led by a US-based asset manager has put pressure on the parent company’s shares, Fine is optimistic that the company will eventually break out after five years of stagnation.

7. Taiheiyo Cement

Ticker: THYCF

Market cap: $2.5B

P/E ratio: N/A

Thesis: This cement and concrete company has a presence in both Japan and the United States, and Fine believes that the latter is more valuable than the entire firm’s market value. Investors may be catching on to this stock, as it has risen nearly 46% in the last year.

8. Horiba

Ticker: HRIBF

Market cap: $2.4B

P/E ratio: 8.1x

Thesis: Horiba manufactures semiconductor capital equipment and trades at only eight times trailing earnings despite rising 23% in the last year.

Fine is one of several portfolio managers who have recently told Insider that they are bullish on Japanese companies as they take the unusual step of prioritizing shareholders.

“Third Avenue has been investing in Japan for more than 25 years — I have personally been investing in Japan for more than 20 years — and I believe it’s very fair to say that never during that time has there been this much pressure on Japanese corporations to think about return on capital, capital allocation, and shareholder outcomes as there is today,” Fine said.

9. Mercedes

Ticker: MBGYY

Market cap: $83.5B

P/E ratio: 5.3x

Thesis: Despite having tens of billions of dollars in net cash on their balance sheets, both German luxury automakers, Mercedes and BMW, are vastly undervalued, according to Fine. The companies have healthy businesses and are repurchasing stock while paying out sizable dividends, but investors do not appear to be biting as Fine would expect.

However, Mercedes and BMW are not alone. Almost every automaker, with the exception of Tesla, trades at an unfavorable valuation as investors obsess over the gradual transition to electric vehicles, though Fine believes the two German auto giants’ moves in that space are being understated.

“It’s becoming clearer that they’re going to be able to compete, and the businesses are not going away,” Fine said. “However, there is a lot of uncertainty surrounding their electric vehicle transition, including how large it will be, who will compete, and how market shares will shift as a result.”

“I think you’re well compensated for all of that risk,” Fine continued, “both as a result of the business valuation but also the balance sheets of both of those companies will take you through all kinds of turmoil and provide the capital for R&D (research and development) and to continue to maintain the competitive position.”

10. BMW

Ticker: BMWYY

Market cap: $75B

P/E ratio: 5.8x

Thesis: Fine’s thesis for BMW is identical to his thesis for Mercedes-Benz.

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