The Money Chase April 2011

Showdown in the Sunshine State

Two of Wall Street's savviest value investors, Bruce Berkowitz and David Einhorn, pride themselves on their rigorous analysis. Now they're locked in a scorched-earth dispute over the value of some Florida real estate. How could they look at the same facts and reach such wildly different conclusions, and what does that say about the “value” of value investing?
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John Ritter

You know a real-estate development is in trouble when the Hertz GPS denies that one of its major streets even exists. You really know it’s in trouble when Google Maps also shrugs, and asks if you wouldn’t like to know more about a similarly named town in Costa Rica.

I had gone to the Florida Panhandle to find out more about an outfit named the St. Joe Company. It sounds like the sort of place that makes designer coffee cake or handcrafted pine furniture, but until recently it was the largest landowner in Florida, a former timber barony that has spent the past decade or so transforming itself into a real-estate developer. Its current roster of developments covers acres of some of the world’s most beautiful beachfront property: sugar-white sand and emerald-green waters unfolding along a pristine, undeveloped coastline. If heaven has beaches, this is what they look like.

I was visiting the beaches because they seemed to hold the key to a very public dispute over the value of St. Joe Company’s assets, and its stock price, that was taking place between two money managers named David Einhorn and Bruce Berkowitz. Both are fairly famous “value investors” of the Warren Buffett school—that is, they rely on analyses of stocks’ fundamentals to reveal stocks that are exceptionally cheap, or outrageously expensive. Both had put rather a lot of money where their mouths were, and that money was talking, loudly. Einhorn’s money was shorting the stock, practically screaming that the company was way overvalued. Meanwhile, Berkowitz’s nearly 30 percent stake in St. Joe Company was proclaiming that the company’s best days were yet to come—and it was speaking not only for Berkowitz, but for all the individual investors who had poured billions into his Fairholme Funds. Like a lot of other people, including many money managers, I couldn’t understand how two very smart guys with strong track records could have such different—and vehement—opinions on what’s basically a simple real-estate operation. Even if both men are known for ignoring the herd and going their own way, shouldn’t we know by now which companies were going to recover from the bubble? So I headed to Florida, to survey the landscape over which this epic battle was taking place. That is, if I could get a GPS to take me there.

The street I was trying to reach was called Firefly Circle, part of St. Joe’s SummerCamp Beach development, where the company had a bunch of lots for sale. The firm’s Web site located it in an area called St. Teresa, about an hour south of Tallahassee. But no matter how frantically I stabbed at its buttons, the GPS was adamant: there was no such street. As I alternately swore and pleaded with the computer, I had the sardonic thought that my battle with the Hertz GPS was part of the larger dispute between Einhorn and Berkowitz: if you can’t find a development on a map, is it worth going there? Indeed, is it worth anything at all?

Eventually I stopped trying to reason with my consumer electronics and just started driving south. I figured I’d run into it—which I did, though I drove past it several times before I realized I was there. The eastern part of the panhandle is not the Florida of Miami Vice and Girls Gone Wild; it’s more like what you see in 1940s movies like Key Largo—empty, underdeveloped, and a bit haunting. SummerCamp Beach turned out to be acre upon acre of loblolly pine, a few houses scattered near the waterfront, and long suburban drives arcing through untouched forest. At 6:30 p.m., when I stopped in at the development’s lone restaurant for some pretty tasty fried shrimp, it was just me and a few retirees, none of whom seemed to live there; they were going to a 7 o’clock lecture at a nearby marine-research facility.

SummerCamp Beach was one of the places David Einhorn had highlighted in a 139-slide PowerPoint presentation before the New York Value Investing Congress in October. Einhorn spent an hour pounding home his argument that the company was grossly overvaluing the real-estate assets on its balance sheet. St. Joe Company had more than half a million acres of land, which it valued at about $750 million. And it derived most of that value from the 41,000 acres for which the company has development rights.

In fact, three St. Joe developments that still have many unsold lots, including SummerCamp Beach, account for almost $300 million of the company’s book value. But Einhorn thinks the real value of that land might be more like $40 million. His target value for the company is $7 to $10 per share, mostly from the rural land that the company is slowly selling off to fund its development operations. When he took the podium, the stock was trading around $24. And as had happened before when Einhorn had given one of his little talks, the effect was rather electric: St. Joe’s stock dropped almost 20 percent over the next couple of days.

And yet, places like SummerCamp Beach are exactly the future that Bruce Berkowitz is betting on. Berkowitz runs a nondiversified mutual-fund company, not a hedge fund, which means he doesn’t sell stocks short, just buys and holds them. He’s so good at it that Morningstar named him its domestic-stock-fund manager of the decade for the 2000s; he generated returns of 13.2 percent when the category average was pretty much zero. And he has bought and held quite a lot of St. Joe Company. Where Einhorn sees worthless pine trees, Berkowitz apparently sees a happy vision of the houses that will one day stand in their place.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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