“As close to a perfect investment … as I’m going to get”

by Travis Johnson, Stock Gumshoe | March 12, 2008 11:26 pm

We’ve passed the one year anniversary of the Gumshoe’s first writing in this space with little fanfare, I’m afraid. It’s OK, I know you meant to send flowers. It’s the thought that counts.

And it was actually when I was going back through my old stuff and trying to figure out exactly what day I did start publishing (it was March 8, by the way — a day when I posted solutions to two teasers, one that I think will be a great long term investment[1], though it had a bad year in the end … and one that is the worst Gumshoe stock of all time[2]: a terrible stock that still might go to zero, representing a company that did not, surprisingly enough, ride Taylor Hicks’ stardom to a Nasdaq listing or fame or fortune, and that has now gone so far as to apparently give up their fight and completely change the focus of their business).

But what caught my eye was a stock that I wrote about later that week, and that I’ve watched for years without buying shares — and it was the first time I had looked at something from Steve Sjuggerud[3]’s Daily Wealth[4], he being a prolific editor who has graced these pages many times, and whose name I have no doubt mangled several times in the past 12 months (sorry about that if you’re reading, Steve). It actually has some similarities to that first one I wrote about, Brookfield Asset Management, in that the real estate[5] slump has cratered the shares to some degree over the past year.

But this one is all about real estate, pure and clean and simple … and they did refer to it as “close to a perfect investment.” Since then it’s down probably 30% or so, though now I’m kicking myself for not taking a nibble back when it was at around $27, for a near-50% haircut from the day I wrote this note (and a dramatic 75% fall from its highs). I remain an admirer of the company, though I have no special insight about whether it will recover this year, or next year, or in ten years … they remain a huge land bank in a growing part of the country, so this is one that I will at least keep a watchful eye on.

As the saying goes, they’re not making any more land. Except for in Dubai, where they’ve made a whole new earth[6] … but that’s mostly concrete, so it might not count.

What follows is that original post, for those who want to check out a little Gumshoe history … I haven’t edited it at all, feel free to add any comments if you like, about this company or anything your little heart desires.

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Ok, so this one is a bit too easy, perhaps — but it’s still an interesting company, even though it’s probably one most of you have heard of.

This came to me via an email newsletter called Steve Sjugerrud’s Daily Wealth that wasn’t specifically selling anything through it’s stock tease — but tease they did, so I thought I’d shine some light on it. They definitely do the “tease and offer” with their premium content, too, with exactly the kind of tenuous hints I like to follow up on — I’m sure I’ll get to some of that before too long.

But this was just a newsletter extolling the virtues of their investing philosophy, which focused on several things that make perfect common sense (look for high rate of return, “complete safety”, no income taxes, etc.) — but the thing they focused on most of all was “total passivity.”

This is “buy and hold” taken to the extreme — companies that you can buy and ignore, and watch them pile up returns over the years without taxes or crises or anything to slow down your wealth accumulation.

And who wouldn’t love that?

In their words, “As long as you’ve chosen well, passivity is not so difficult.”

So that comes complete with a “duh.”

“When it comes to your investment portfolio, the old adage holds: If it ain’t broke, you need to have the peace of mind and, yes, the discipline, not to fix it.”

And then they got into the little company teaser:

“Recently, for example, I found a company that owns about 800,000 acres of land in Florida, including over a hundred miles of undeveloped beachfront.”

And then the real “take notice” sentence:

“As far as I can tell, buying shares in this company is as close to a perfect investment … as I’m going to get in my lifetime.”

The other clues:

• very little debt
• “all that land… most of which was purchased in the early part of the 20th century for as little as $2 an acre.”
• “Today, some of that land has been developed… and has sold for as much as $61 a square foot, or $2.7 million per acre.”
• “The land is easily worth four times what the company trades for in the stock market today.”

Well, after reading that I’d have to agree that they’ve got a point when they say that it “looks a lot like the definition of a perfect investment.”

But of course, the positive side is never the only side of any investment thesis — the shares of this company have come down precipitously from their highs of around $80 back in 2005, but they’re still double where they were five years ago, probably in part because of the housing boom and the attendant investor fixation on land and real estate.

And when you’re buying what is essentially a land bank you’re betting not only on the future value of land, but in this case, on land in a specific geographic area … and I have no idea what issues they might have with development, zoning or anything else.

You’re certainly not going to buy this company based on earnings or dividends[7], since the PE ratio is stratospheric for a slow grower at 80 and the dividend is right around 1%. That doesn’t mean it’s a bad investment, of course — the PE ratio hasn’t looked particularly attractive in a long time since they’re fairly conservative about developing and/or selling the land at a measured pace, and though it’s a huge land holder it’s not a REIT so there’s no particular guarantee of an income stream for investors.

I’ve definitely heard of this company, but have never researched it in detail … though I do hold some shares indirectly through the Third Avenue Real Estate Value Fund.

(And the fact that Third Avenue holds a huge portion of this company, close to 20% of the outstanding shares, should also tell you something about the relative worth of the firm and their land — I wouldn’t bet against Marty Whitman and his team for anything in the long term).

Oh, I forgot to spill the beans: In case you haven’t guessed, or didn’t know as soon as I typed “800,000 acres of Florida land,” this “perfect” investment is …

The St. Joe Company (JOE).

So do your “due diligence” and figure out what you think of this massive Gulf coast landowner — you might like what you see, you might not, but at least you know the company’s name (and remember — all that “perfect” stuff, that’s from the Daily Wealth people, not from me). Until next time, that’s all from your friendly Stock Gumshoe.

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Back to your older, wiser (?) 2008 Gumshoe: The disclosure remains the same — I still have money invested Third Avenue Real Estate Value, and that fund is still a pretty big holder of JOE, though they have most recently been a seller, not a buyer, according to Morningstar[8].

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