Friday, September 14, 2012

Why I Own JOE

When analyzing the St. Joe Corporation, I say it basically boils down to who do you believe: David Einhorn or Bruce Berkowitz?

First as a background, Bruce Einhorn is 44, and has run his hedge fund Greenlight Capital since 1996. He started Greenlight with a million dollars from friends and family and has parlayed that to a billion dollar personal fortune. He is a both long and short money manager. But his most famous moves have been shorts against Allied Capital and Lehman Brothers. He often publicizes his short positions with jazzy powerpoint presentations in conferences. One of his current (or recent) shorts is St. Joe Corp. (JOE). Here is his presentation from the Value Investors Congress in 2010.

On the other side of the bet is Bruce Berkowitz, who founded and manages the Fairholme fund since 1997. Berkowitz was named the Morningstar manager of the decade in 2009. Fairholme fund returned about 12% over that decade. That beats the benchmark about by about 10% per year! I have followed him for the last half dozen years and he is one of my most respected investors. He has been a long time JOE investor and recently he has put his reputation and money on the line by buying up 27% of JOE and becoming the chairman on its board.

This is truly a clash of the titans. It is not only enjoyable to watch but also educational. But I am betting on Berkowitz, here's why.

JOE has a market cap of $2B with a tiny staff. It is simply a landowner and all its value is tied to the land it owns. JOE owns about 570,000 acres of land in northwest Florida which is right now full of timber and a few small residential communities. Based on their market cap their land is worth about $4k per acre. As a point of reference, good farmland in Iowa sells for about $10-20k. Farm land values has been rising recently.

Einhorn says the land on their books is overvalued, interest in the land is minimal, He says if we wrote down the value of JOE's land to its true value, JOE would be worth $10 a share. I surmise that this is my floor on the downside.

No doubt Berkowitz does not agree. Berkowitz has positioned himself in control of the company and he has a clout and resources to make sure JOE sustains itself in the near term. So JOE is under no financial or shareholder pressure. Berkowitz can and is willing to wait it out.

As an investor, I don't like to get bogged down in details when analyzing stocks. I hear JOE's pros and cons. But like religion, one can argue JOE's pros and cos for ten hours without changing anyone's mind. Instead, I look for the views the market may have misjudged. In JOE's case it is about land. Two prominent investors have recommended investments in land. Michael Burry is buying up farmland. And Jeremy Grantham is recommending timber land. Grantham states we are going to be in a harsh world full of resource shortages. I am not as pessimistic as he, but I see a lot of truth in his argument. JOE is the most liquid pure play on land and timber that I know of.

I am not a short person.... hmmm I mean I don't short stocks. But I do appreciate the value of shorts in financial markets. Nonetheless, I also realize that shorts think more short term, when they short they have interest to pay and they will only realize their gain if the stock drops. Thus they have a heavy interest in a big quick drop. A long term investor who buys a share of business can in theory retain his share without caring what the market prices his share.

So Berkowitz has positioned himself to wait out Einhorn. The company made a small profit in the most recent quarter and has minimal expenses. We are (hopefully) past the depths of the housing recession. JOE should participate in the housing comeback.

And lastly, I feel very comfortable with Berkowitz's investment ability and style. and I have followed some of his other investments: AIG and SHLD. So when JOE was $18 in July 2011, I bought. At $18 JOE would drop 40% to reach the $10 value that Einhorn gave. Today it is over $22.

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