metoo105 (30.87)

Einhorn v. Berkowitz

March 24, 2011 – Comments (0) | RELATED TICKERS: JOE , TRC

Einhorn and Berkowitz are two money compounding investors with enviable long term records. They've taken opposite sides of St. Joe's, with Berkowitz long and Einhorn short. Berkowitz has been a long time holder of JOE. Currently, he is the largest shareholder with 30% of shares. Einhorn has an undislosed short position, but his "presentation" on the company has led it to become one of the top ten most shorted stocks with 40% of outstanding shares short. That's is quite literally every share that is available to borrow with a few extra for good measure. JOE is a fascinating study in which two giants are opposed. Who is correct? I think we should split the baby on this one.

Berkowitz recently unseated JOE management after taking a board seat. He is now half way through installing a new management team. Earlier management probably sucked, and the company will be improved with Berkowitz's new team who will in all likelihood effectively lower the burn rate. (The company has been a steady money loser for years.)

Einhorn is probably correct in his analysis that JOE gave away most of best properties and that the Florida market will not recover to earlier highs for many years to come and that on a fundamentals basis you have a $2 billion company with a $100 million in forestry sales from a mismanaged and underperforming asset.

However, I do not think that Berkowitz's end game is fundamentals alone. Rather the inflation that will soon ricochet through our economy will send investors fleeing to tradition inflation safe havens like raw land. As Oprah likes to say, "God isn't making any more of it." This perception alone will send the stock soaring up from its current valuation. How low it will go on its way down before reversing course to an improved valuation is hard to say, but Einhorn's target of $10 is still certainly likely.  Hence, let's split the baby.

I believe that there is some confirmation for this in that Third Avenue, another badass investor and a substaintial stakeholder in JOE, is also a major holder of TRC, Tejon Ranch, another major land development company in California (25%). In addition, Black Rock funds are invested across most of the land rich companies that also include the other forestry names like Potlatch (a lovely name for you former anarcho-syndicalists) and PCL. This is all to say that there are certain smart money names jumping into the same space.

Frankly, I seriously doubt that Einhorn has much of a stake in JOE any longer. For one, he's made his money. For another, when the short interest rises that much, there is too much risk baked into the price, even if the ultimate valuation reaches a much lower price. The risks of a short squeeze are much higher than for a company that has already soared as many hedge managers learned the hard way during the VW Porsche affair. Smart money steps to the sideline. Einhorn has already got his capital stashed away in a new name he hasn't told you about yet.