Value Investing Congress, Day Two

By Travis Johnson, Stock Gumshoe, October 13, 2010

A quick note for you during the lunch break for today’s congress:

I heard some very good presentations backed up by stupendously thorough analysis this morning, including a great presentation by Kyle Bass on Japan’s debt and the debt of other heavily leveraged countries, and an argument from Michael Kao that the convertible bonds of old GM present a remarkable value compared to Ford equity (since GM debt will become equity after the IPO). Bass’ presentation was particularly compelling, especially as it pertains to the certainty of a default by Japan, Greece, Ireland and several other countries, with that certainty accelerated if interest rates go up even rather modestly, and probably an avalanche of sovereign defaults over the coming years (could be many years). At the same time, of course, other analysts like Mohnish Pabrai and Guy Spier noted that there are many Japanese companies, particularly smaller ones, that trade for ridiculously low valuations, even less than net cash value … and even a declining society or default doesn’t mean that a country or company ceases to be relevant (Spier used the example of Holland — declining over hundreds of years from being arguably the leading world power, but still home to several powerful multinationals and “a nice place to live”).

So there are some ideas percolating there — but the one that’s going to make headlines today, as you might expect, is David Einhorn’s airing of his extremely compelling short case against St. Joe (JOE), which is often a value investing favorite because of their “hidden” land value (I think the last value newsletter that teased this one was Extreme Value from Stansberry, and I wrote about it within the last few months, but I’ve seen it recommended many times). Einhorn tore their balance sheet apart, visited many of their purported “developments” and the airport that they subsidized, and came up with the conclusion that the company is doomed.

He said that they do still have some value, but the value is in their rural land that they can sell for maybe $1,800 an acre or so — old timber land that’s not on the beach or near a town. And he further says that they’re essentially destroying the value of their rural land (which might make the stock worth as much as $7-10 if they sold it off today — the stock was trading at $25 before his presentation and is down about 10%), because they’re selling off parcels of rural land in order to fund what is essentially Quixotic development of ghost towns that almost can’t be worth as much as they’re investing to develop the land (including big amenities like golf courses, massive costs like rerouting highways, etc.).

The catalyst for the company to drop in value on the market, presumably, would be when they write down the value of their developable land and their real estate “developments” (most of which are still undeveloped home sites). He says, effectively, that they’ve sold just about all the good stuff on the beach already, and have more or less stopped working on all the rest because no one wants to buy it and they must be able to see that they won’t get their investment back. So in Einhorn’s view, the 41,000 acres or so of “entitled” land is not only not dramatically valuable, as JOE would have us believe and clearly other smart people like Bruce Berkowitz believe, but at the value they’re carrying on the JOE balance sheet that land is much more of a liability as writedowns seem inevitable. JOE has apparently been reluctant to write down their land value except when they have to (when they sell it).

The photos of the ghost towns that Einhorn’s researchers visited and the “home sites” and homes that have been sold were hard to ignore, it was a rigorous presentation and I came away from it being pretty convinced that JOE is a disaster waiting to happen — eventually — unless something extraordinary props them up (ie, another meaningful property boom in Florida that somehow sucks up Joe’s land and all the other competing ghost towns and unfinished developments in nearby areas).

Rubbing salt into the wound, he also said that they seem to be hoping for a miracle in a lawsuit about the BP oil spill because it arguably drove their share price down (Einhorn says it went from way, way overvalued to way overvalued), while at the same time reporting to their shareholders and potential customers that there’s been no meaningful damage on their beaches from the oil spill (which is apparently true, absent reputational damage, I suppose).

I don’t own St. Joe and am also not short the shares, and I don’t know if I’ll do anything with JOE in the future, but this did make me think about the timber REIT I own, Rayonier (RYN) — I’ve been a lackadaisical owner of the shares and have enjoyed watching them compound over the years, but part of their business is quite similar to JOE (to a much, much more limited degree). RYN is trying to turn some old timber lands near the coast into more valuable residential and commercial real estate. This tells me I should get into their balance sheets and see how they’re valuing this land, to what degree they’re selling off their land to support the dividend, and how the business has been changing since the real estate crash … something I should have done a while ago, I’m sure, but it’s easy to ignore a successful and rising investment.

So … back to the conference, that work will wait for another day. More later in the week or early next, we’ll see if the last few presenters make any headlines but I imagine the Einhorn reaction will be the biggest of the conference this year … and, frankly, it was clearly the most thorough analysis, you might not like to sell stocks short and you might dislike the idea of short selling, but careful short sellers often do a lot more work than the rest of us when evaluating their investments, and I appreciate that Einhorn was willing to share his work. Of course, if he’s right he’ll make a lot of money, and if he’s able to get the word out through conferences like this he’ll make that money more quickly, so the thoroughness of his analysis doesn’t mean that there isn’t another side to the argument.