As I'm a little bit of a contrarian, I'll be trying to convince you in today's article why I believe making a bet on St. Joe Co. (JOE) for 2014 is not as crazy as it seems. St. Joe Co. is a 1.66 billion real estate developer mainly active in Northwest Florida whose share price has been seriously going downhill last couple of years. To be more precise: Its share price fell from over $60 in 2006 to $18 today.
Latest quarter: Q3 2013 EPS and revenue beat
During its latest quarter, St. Joe Co. was able to beat analysts' expectations by 400%.
The general market was expecting the company to report $0.01 in EPS but the company reported EPS of $0.05. The beat was mainly caused by the company's efforts to lower expenses and its growth in revenue from its resorts, leisure and leasing operations (50% of total revenue).
Total revenue in the third quarter was $36.8 million, which also beat the consensus estimate of $31 million.
St. Joe Co. ended the quarter with $22.8 million of cash and cash equivalents while having a total debt outstanding of $37.8 million.
St. Joe Co. is not a very popular stock at the moment; it currently has a short ratio of over 29.34, which means that it would take about 29 days for the short sellers to cover their positions. This is a very impressive number and tells us that there is definitely a bearish sentiment around this stock. I believe that this bearish sentiment is giving us a unique opportunity.
For the next quarter, the consensus estimates an EPS of -$0.01. If St. Joe beats this by $0.01, the company could skyrocket to $21 as there would occur a nice short squeeze.
St. Joe Co. is a highly shorted stock while in the midst of becoming a real turnaround story. Management has implemented a number of cost reduction initiatives in the recent years and as a result, in the nine months ended Sept. 30, 2013, operating expenses fell 10% year over year, while in 2012, operating expenses declined 74% year over year. Due to the expense saves, the company can boost its cash position and use its cash flows to withstand a volatile real estate environment.
In the meanwhile, St. Joe Co.'s land portfolio is also being optimized as the company is exploring potential opportunities to sell timberland, rural land and related timber rights that are not strategic to the company's core real estate development activities. In relation to this, St. Joe Co. was already able to sell 382,834 acres of timberland for $565 million. These efforts will help the company to support its growth needs.
On top of this, Northwest Florida traditionally lags behind the rest of Florida in economic growth, so higher growth rates in Northwest Florida should start to kick in during 2014.
A potential short squeeze could be triggered by better than expected Q4 figures.
My first price target is $21, indicating a 16.6% potential gain.