It's no secret that I'm a fan of activist investors.
But don't be misguided by the term "activist." These aren't patchouli-smelling long-haireds singing "Kumbaya" in Golden Gate Park - that's hardly the image that comes to mind when you think of noted activist investor, Carl Icahn.
An activist investor is one who owns 5% or more of a company and demands changes from management. Those demands often include...
- Selling the company.
- Declaring a special dividend.
- Firing an incompetent CEO.
- Replacing members of the board of directors.
Basically, any initiative that will enhance shareholder value.
What's more, activists are usually successful and help drive the share price of the company in question higher. In fact, professors at New York University published a study in the Journal of Finance, which concluded that stocks with activist investors outperform the broader market by 21.6% per year.
That level of outperformance is why I launched The Activist Trader.
And right now, there's a big story involving an activist investor.
A Hollow Victory
Bruce Berkowitz of Fairholme Capital owns nearly 30% of St. Joe Company (NYSE:JOE).
He and a colleague recently joined the real estate firm's board of directors, then promptly resigned after other board members resisted his efforts to make changes to the company.
Score one for St. Joe, right?
Wrong. A short time later, Berkowitz pushed out the CEO and rejoined the board as Chairman.
Like all activist investors, he doggedly pursued his goal in order to enhance shareholder value. And while I support most activists' efforts in this regard, I think he's wasting his time with St. Joe, as there's little value to enhance.
I first wrote about St. Joe in 2006, when the stock was at $60. At the time, I argued that its land was grossly overvalued, properties weren't selling and the stock would fall.
Today, it's down by more than 50%. And you know what? The price should get cut in half again. Why?
Swampland and Dreams
For nearly a century - up until 1997 - St. Joe was a paper company. Then it became a land developer. It's now the biggest landowner in Florida. And here's where it gets a bit sneaky...
In the mid 2000s, St. Joe revalued much of its land to reflect its value if those areas were developed, rather than forestland. But there's a big reason why the land can't be developed: It's deep in the swamps, miles from any "civilization."
St. Joe was literally trying to sell swampland in Florida.
It's tough enough to sell property on the beach in the "Redneck Riviera," also known as northwest Florida these days. But it's darn-near impossible to sell it if it's in the woods where "we've got critters, we've got heat, we've got humidity," a St. Joe executive once told The New York Times.
Even where St. Joe has built luxury homes, the prime spots on and near the beach were built and sold long ago, leaving the company with a lot of less-desirable land, unsold homes and communities, some of which are referred to as ghost towns.
That reflects the wider trend in Florida, where real estate sales are very difficult to come by these days. In four out of five developments, less than a quarter of the home sites have been sold. And many of the ones that did sell have been foreclosed, which will keep a low ceiling on prices.
So it's no surprise to see St. Joe hemorrhaging money.
The Money Pit
In 2009, St. Joe lost $209 million from operations and another $51 million in 2010, as its real estate sales were slashed in half. The reason for the lower loss was a smaller impairment charge, due to write-offs of lost land value.
Based on land sale prices over the past few years, St. Joe's half a million acres are worth between about $600 million to $1 billion. But a more realistic assessment of its property values will likely lead to further write-offs, as Florida land prices continue to slide.
The losses are expected to continue for several years, too. Even Berkowitz agrees that St. Joe's current business model wastes shareholders' money.
So what has St. Joe's management pinned its hopes on?
Chasing Value Where It Doesn't Exist
A strategy that never works... lawsuits.
The company is suing Halliburton (NYSE:HAL), Transocean (NYSE:RIG) and others responsible for the Gulf oil spill, while at the same time advertising that its beaches are beautiful and weren't harmed by the disaster.
Berkowitz said he's considering dropping the lawsuits.
David Einhorn, a vocal critic of St. Joe and a fund manager who is short the stock, said that at today's prices "it costs more to turn raw land into a finished lot than the lot is worth... and it's not even close." He added that the company should be sold, but that it's worth significantly less than the current share price.
Now if the name David Einhorn sounds familiar, he's the one who told Wall Street that Lehman Brothers was going to fail, although few people listened to him at the time.
I actually support Berkowitz's efforts to extract value for shareholders who've seen the stock steadily decline for the past six years. I believe he's doing shareholders a service by getting rid of ineffective management, reining in costs and perhaps changing the business model.
But with a rebound in Florida land values years away, there's just not much value in St. Joe to squeeze out.
Look for St. Joe to continue trading lower throughout the year.
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