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David Einhorn's Short Thesis For St. Joe: The Highlight of The Value Investing Congress

October 13, 2010 | About:
I am lucky to be attending the Value Investing Congress. I took extensive notes on every speech and hope to post each one on GuruFocus over the next few days, in addition I will be posting a couple of interviews I plan on conducting. To follow my live updates from the Congress sign up for my Twitter alerts http://twitter.com/valuewalk

David Einhorn was by far the best speaker of the Congress in my opinion. He focused his entire presentation on one item; why he is now short St. Joe Company, ticker (JOE). The presentation consisted of 139 slideshows about why he is short the company.

I will cover all the points of his speech that I was able to write down. Any statement I was unsure of I did not include. However, it is possible that I misheard one or two things. This was particularly hard with Einhorn’s presentation as he went through 139 slides in only 40 minutes. All members of the Congress were given the slides, if in the future I am allowed to release them publically I will certainly do so.

David Einhorn is the Chairman of Greenlight Capital (a value-oriented investment advisor), believes an investment approach emphasizing intrinsic value will achieve consistent absolute investment returns and safeguard capital regardless of market conditions. Prior to founding Greenlight, he was at SC Fundamental. Before that, he was at DLJ.

He is particularly famous for his short call on Lehman Brothers and Allied Capital shortly before their collapse.

Before Einhorn spoke Whitney Tilson stated that David Einhorn’s bookFooling Some of the People All of the Time (which details Einhorn’s short of Allied Capital), is one of the best books on investing he ever read.

Before his talk began, Einhorn remarked that since his talk would likely go past the allotted time of 40 minutes, the audience should feel free to leave for lunch “or call your broker.”

Einhorn’s was not joking. His comments caused a massive increase in volume on the stock, and a decline of nearly 10% by the end of his speech.

David Einhorn reached out to St Joe Company previously but they declined to comment.

The company became an active land developer in 2007.

Einhorn’s thesis is that the Jacksonville, Fla. land developer has expanded beyond its timberland and rural assets to develop residential communities and are not providing a sufficient ROC to justify the current price of approximately $24.50 (before the speech was given).

Einhorn believes the stock is worth more like # Einhorn’s comments caused a massive increase in volume on the stock, and a decline of nearly 10% by the end of his speech.

Einhorn believes the intrinsic value of St. Joes is about $7-$10 per share.

The main thesis that St. Joe’s Florida real estate assets are worth nowhere near the $745 million which the company is currently valuing them at.

One problem is that St. Joe only seems to write- an asset when it is sold.

For example, the company sold some assets late last year that had a carrying value of $74.5 million until a write-down two days right before the sale to only $11 million!

Another example of the company refusing to write down assets is a development called Windmark Phase II, which is mostly unbuilt currently. Einhorn believes it is worth $17.8 million, while St. Joes carries it on its books at $165 million.

Einhorn stated that be believed he rural land to be worth $850-950 million, or $7-10 share with the rest of the land having a very small valuation.

Einhorn said that when the real estate bubble burst, the company assured investors that when the new airport got built near some property the company owned, the situation would improve.

When this prediction did not come to fruition, the company started telling investors that they were damaged by the BP oil spill. St. Joe recently filed suit against some of the companies involved with the oil spill, including Halliburton, and Transocean.

This seems pretty silly since the oil spill did not have a large/any real impact on its Northwest Florida beachfront properties.

Einhorn thinks that the management should sell the company even though it would be hard at the current price. They would likely have to sell at a large discount.

St Joe started cutting back cut back on development spending after the housing bubble, and they can’t generate enough value to justify the costs of building out developments.

Einhorn thinks the company is stuck because it is cost prohibitive currently to turn their unfinished lots into final products.

Right away when Einhorn mentioned St. Joe the company rang a bell in my head. I remembered one of the big value investors owned it. I checked up GuruFocus and saw that Bruce Berkowitz has a large stake in the company.

I immediately rushed to open the 14-A, and saw that Bruce Berkowitz owned 29% of the shares. I rushed to ask Einhorn his take on this fact. Someone else beat me to the question. Einhorn said he sent Berkowitz a letter offering to explain his position. “We’ve been standing by waiting for his call.” One member of the audience also told me that Einhorn stated that he is holding the stock for his grandchildren (although I did not hear the words myself).

It will be interesting to see if Berkowitz makes any public statements about the company in the next few days. Although I am a mere mortal compared to both these investors if I had to pick I would side with Einhorn as he seems to really understand financials. Berkowitz only recently started buying financials and I doubt he has as thorough of an understanding as does Einhorn. However, I really hope Berkowitz makes a public statement about the company.

One member in the audience asked what could help the company? Einhorn answered “Well, they could discover real oil”. The audience had quite a laugh.

Einhorn thinks the bulls are looking at what the company will be worth in 20-30 years, however at this rate Einhorn doubts the company will last that long.

Einhorn was not all bearish, he likes Vodafone and thinks it is under-valued.

Disclosure: Long BP, no positions in any other companies mentioned although it will be interesting to see how St. Joe plays out.

http://www.valuewalk.com/


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.6/5 (22 votes)

Comments

guruek
Guruek - 3 years ago
Read the full presentation here:

http://www.gurufocus.com/news.php?id=109423
paulwitt
Paulwitt - 3 years ago
Correction: David Einhorn's book "Fooling some of the people ........" was about shorting Allied Capital not MBIA.

I know about Allied Capital because I was long the stock. I liked the BDC (business development company) model with a conservative balance sheet of 1:1 debt/equity (maximum), increasing dividends (with a payout similar to a REIT), diversity in multiple small businesses, income with a equity kicker, and a great history.

Allied was bought out by Ares Capital (ARCC) if I remember correctly. ALD did not survive in my opinion because they could not meet the 1:1 debt/equity requirement with the accounting markdowns (mark to market) during the crisis.

As for JOE I have owned them off and on for a couple of years. I bought it because Bruce Berkowitz had a large position in it, the balance sheet looked good, and I saw it as being undervalued. I came to the conclusion however, that it was dead money for the time being (I was looking for immediate earnings).

As of now, I do not have a position in JOE, but I would buy it again when most stocks reach

fair value......

As a side note, I believe Peter Lynch mentioned in one of his books that he had a position in Allied Capital when he ran Magellan.

adelaide1997
Adelaide1997 - 3 years ago


Jacob, if you did your homework you would realise that Berkowitz was a financials analyst back in the day and made great calls on Wells Fargo. I agree Einhorn cuts to the punch so well, but never count Berkowitz out.
superguru
Superguru - 3 years ago
did Einhorn mention more about VOD? What is his estimate on VOD fair value?

yswolinsky
Yswolinsky - 3 years ago
I know that Einhorn has made several great calls on financial companies. Berkowitz just started loading up on financials for Fairholme. Before that he was making most of his great returns in companies that generated lots of free cash flows which did not include financials.

That is why I made my statement, but overall I think we are in agreement.
mevsemt
Mevsemt - 3 years ago
I'd go back and reread "You Too Can be a Stock Market Genuis" by Joel Greenblatt...

Specifically the section on LEAPS...

You'll notice in the early nineties it was an obscure analyst (that Greenblatt had never heard of) writing his investment case for Wells Farge in OID - a stock which the analyst had been buying heavily - that persuaded Greenblatt to buy WFC LEAPS for Gotham. And of course that analyst was a young Bruce Berkowitz...

-MEvsEMT, www.mevsemt.blogspot.com

san
San - 3 years ago
Jacob, i'd like to know if Einhorn share his thought about why JOE catch his eye?

I suspect, there must be something (like stock screening or something like that) that made him think, to do more investigation to a company in this case JOE.

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