The St. Joe Company (JOE) reported a decent quarter recently, but its stock has traded sideways. The latest news on signing a letter of intent with Green Circle Bio Energy Inc. has given the share a bit of lift but the price has been down about 20% from the recent high. This occurred in light of a fairly upbeat quarterly report that shows a very substantial increase in the residential sale activities. This is consistent with the national housing recovery trend, but the commercial side has been very weak. Given that the commercial activity is usually lumpy, we would not try to give too much weight to one quarter of weak commercial sale data. Overall, we think that the quarterly result and management's small progresses on developing the port of Port St. Joe should be incrementally positive to the share.
What appears to be hanging over the JOE stock is its shelf registration filing on April 25 that included about 25 million shares that the Fairholme Fund holds. The filing raises the question of whether Fairholme is ready to sell its stake. We note that Fairholme, holding about 28% of JOE's shares outstanding, has been an active investor in JOE with its manager Bruce Berkowitz serving as the Chairman of the board. On the other side of the trade is the famed hedge fund manager David Einhorn of Greenlight Capital.
In responding to the question on the shelf registration during the quarterly call, JOE CFO Tom Hoyer attributed the filing to a technical issue of valuing Fairholme's JOE holdings:
"Fairholme has to be part of the shelf registrations; they wanted their shares to be registered. Since many of you are familiar with the rules around mutual funds and the valuing of assets in mutual fund. Then registered shares at Fairholme were being fully valued in their portfolio by registering the shares, they now are fully valued and need to go out in the full value of shares. Truly, an administrative thing Fairholme just asked us to do this."
- see the call transcript from Seeking Alpha
Since any sale by Fairholme will have a huge impact on the stock, we attempt to analyze the possible motives of Fairholme on this filing. It appears that there are three possible reasons for the inclusion of Fairholme's holding in the filing; we discuss each of them as follows.
- The Fairholme Fund wants full valuation of the JOE shares in its portfolio as is explained by the management. In the latest Fairholme Fund report (Nov. 2012), the 23,136,502 JOE shares were valued at $20.7386 per share on 11/30/2012 (see the footnote c on p.9), while the JOE closing price on 11/30/2012 was $21.38 with a high of $21.84 and a low of $20.95 on that day (according to Yahoo). This shows that only a small discount is applied to the share price, particularly when considering the low of the day, and its impact on NAV of the Fairholme fund is nearly negligible. So, given the psychological effect such a filing can generate on the JOE shareholders and the pressure it creates on the share price, we find it hard to believe that the full valuation could be the main motive here.
- The Fairholme Fund is ready to sell all or part of its JOE shares. JOE has been trading at around $20. The cost basis of Fairholme's 23,136,502 shares is $607,609,975 working out to $26.26 per share - see Fairholme Fund report (Nov. 2012). When David Einhorn made his famous presentation on JOE in 2010, JOE was trading at high $20s; so our estimate of the basis of his shorted shares is likely to be somewhere over $30. Since the investing business may be as much about winning as making money, we think it is not likely that Bruce Berkowitz would sell in low $20s at a significant loss. To support that view, we note that the Fairholme Fund has been doing very well in the past two years and is not in any distressed situation (i.e. massive redemption) to sell any holding. Besides, the housing market is in rapid recovery. The time appears to be on Mr. Berkowitz's side now.
- The Fairholme Fund is anticipating the share price gain and is planning to sell all or part of its JOE shares when that happens. We think this is the most likely motive. With the housing trend and a large number of shorted shares in JOE, a bit of positive development in JOE could significantly move the share price higher. By holding an effectively controlling stake in JOE, the Fairholme Fund is in a very unusual situation and should obviously be looking for an opportunity out. So, we think Fairholme may start to cut back its holding when the share trades above $30 (a purely speculative number on our part).
The above analysis led us to believe that the Fairholme Fund is probably looking to reduce its JOE stake but will only sell when the share price is right. They might have a better insight on how JOE's business is going and may be positioning themselves for a possible share price move. For retail investors, we think JOE offers an excellent opportunity to participate in the housing recovery and to hedge against inflation, while carrying limited downside risks.
Additional disclosure: I also invest in the Fairholme Fund.