Tuesday, May 24, 2011

New coattails to ride?

IMHO Bruce Berkowitz is one the best investors out there, and yesterday I came across a great article about him and one of his holdings, St. Joe (JOE) - http://www.institutionalinvestor.com/Article/2824162/Fairholmes-Bruce-Berkowitz-Is-Beating-Hedge-Fund-Managers-At-Their-Own-Game.html?ArticleId=2824162&p=1.  In fact, after reading the article I came to see JOE in whole new light... 

But before we get into that let's take a quick step back.  For regular readers of my blog you know I've been following JOE for awhile, and what I've come to find is it's a bit of a unique beast.  They are the largest owner of real estate in Florida; most of it is timberland, some of it is beach front, and smack dab in the middle is a brand new international airport.  As you can imagine the housing bust was not kind to them, and if you take a look at their 10 year chart they've basically made a round trip and are back to square one. 

Personally, I think the NPV of JOE's real estate is worth somewhere between $25 and $35 a share.  This assumes the economy continues to recover and the housing market returns to normal over the next 5 to 10 years.  Of course, if JOE were to sell all their real estate today they'd only be worth $10 a share, but the fact is they have a healthy balance sheet and can afford to wait for prices to recover.

Now here's where it gets interesting.  Berkowitz (who owns about 30% of JOE via his mutual fund) recently decided he was unhappy with the way the company was being managed, so he went in and fired the top executives, swapped out most of the Board of Directors, and made himself Chairman of the Board.  BUT I'm not excited because I think Berkowitz will do a better job selling real estate...

The thing about Berkowitz is he runs a mutual fund (i.e. not a hedge fund).  So, when it comes to investing, he's got one hand tied behind his back due to restrictions on owning real estate or other illiquid assets.  The great thing about JOE is it solves that problem - by controlling the company's capital allocation Berkowitz can effectively invest in real estate and other illiquid assets via St. Joe!

So, over the next several years I'm guessing we'll see JOE monetize its real estate in various ways (outright sales, joint ventures, etc.).  Then, probably somewhere around the 5-year mark, we'll begin to see JOE dabble in non-real estate deals.  Finally, after 10+ years I think there's a very real chance that JOE looks a lot more like a Leucadia or Brookfield Asset Management than its current self, which would make an investment at today's prices an absolute home run.  More simply, it's my hope that Berkowitz uses JOE as a vehicle for allocating capital, and in doing so turns it into a wealth compounding machine... 

So with that in mind I decided to jump on his coattails now while there's still room, and yesterday I purchased 1000 shares at $22.23, for a total outlay of $22,235 (including commissions).  Wish me luck!

Questions?  Comments?  Email mevsemt@gmail.com