It has been nearly a year since David Einhorn's presentation at the Value Investing Congress called into question the real value of St. Joe (JOE) and its vast land holdings, which are located in the Florida panhandle. Einhorn's skeptical view of the company, and his belief that St. Joe's was carrying assets on the books that were impaired and should have been written down, ultimately helped to drive shares from about $25 in early October to $17 the following month. Einhorn's presentation resonated, and it was clear that he had really done his homework.
But by early 2011, St. Joe's shares had shaken some of the negativity, and were approaching $30. If shares had been driven down due to the analysis of one well-known value investor (Einhorn), they were driven back up due to the contrary view of another, Bruce Berkowitz, who is the brains behind the Fairholme Fund. With a 29% stake in the company, Berkowitz became an active force in trying to right the ship at St. Joes. Last March, he became chairman of the company, while Fairholme President Charles Fernandez became vice chairman, and two Fairholme nominees, including former Florida Governor Charlie Crist, were elected to its board of directors.
Then in July, the Securities and Exchange Commission (SEC) launched a formal investigation of St. Joe's and Berkowitz, which covered securities law and anti-fraud provisions for officers and members of the board, internal controls and financial reports. The issue of impaired assets, and call for the company to write down the value of these assets that Einhorn had called for were now being reviewed by the SEC. By now, shares were once again trading in the high teens, and had come full circle since Einhorn made his bearish case.
End of story for St. Joe's, right? Not so fast. Bruce Berkowitz is not giving up on the company, and intends to increase his stake. On Friday, St. Joe's filed an 8K with the SEC, which will allow Fairholme to increase its stake in the company up to 50%. The markets welcomed that news, and St. Joe shares rallied 6.5% on Friday, closing at $18.20 on twice-normal average volume.
For the past year, St. Joe's stock price has been driven by primarily by two opposing forces: David Einhorn and Bruce Berkowitz. It is the classic case of two very successful investors with dramatically different views on the same name. While I would not expect Berkowitz, whose Fairholme Fund is having a bad 2011, to quickly ramp up to a 50% stake, the very notion that he plans on getting there may be a short-term tailwind for St. Joe's.
Still, the fundamental story has not changed very much. St. Joes owns a lot of land, 574,000 acres , or nearly 900 square miles, which is 13x the size of the District of Columbia, or about 60% of Rhode Island. But the company lacks a catalyst. Although the land has some value, what it is truly worth remains to be seen. But in order for any value to be realized, St. Joe's must convert the land into cash. In order for that to happen, a whole lot of folks need to be convinced that the Florida panhandle is an up-and-coming vacation or second home destination. Given the state of the economy, that's a tall order at this point.