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An Alternative to Berkowitz and Einhorn's Battleground

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It's been awhile since we've had such a public battle by two very successful fund managers over one company, but the spat between hedge fund manager David Einhorn and Fairholme Fund's (FUND: FAIRX  ) Bruce Berkowitz has been a good one. The disagreement is over the value of Florida real estate developer St. Joe Co. (NYSE: JOE  ) , in which Berkowitz is one of the company's largest shareholders with a nearly 30% ownership stake in the company. On the other side of the trade is Einhorn, who has been very public in his disdain for the company, recently sharing a 139-slide presentation at the Value Investing Conference to explain his large short position in the company.

Both investors present very compelling arguments, but I am content to let them duke it out, because I believe there are similar investing opportunities that provide much less risk.

The whole argument led me to take a look at the residential real estate market. There's certainly value there, especially in retirement communities in places like Florida and Arizona, but it is a question of timing and when the values will rise. There is only so much real estate in these areas, and people are still going to retire and move south, right? But since I don't know when real estate values will bottom and when they will increase, I need a margin of safety to invest in this space. After doing some digging, I believe that Avatar Holdings (Nasdaq: AVTR  ) provides this valuation backstop if indeed the economy does falter and real estate prices fall even further.

A better value
I recently highlighted Avatar Holdings as a very cheap play in a sector that doesn't really offer much in the way of value. The real estate developer is very similar to St. Joe. It develops and manages property in Florida and Arizona, while St. Joe is primarily a Florida developer. The big difference between the companies is in the valuation, which prices Avatar at near-liquidation levels at a 0.59 price-to-tangible book value ratio, while St. Joe trades at a significant premium to Avatar at 2.66.

With a $270 million market capitalization and net cash of about $84 million, Avatar has an enterprise value of well under $200 million. Aside from its large cash position, Avatar's largest asset is its vast inventory of building lots and other real estate. That land may not be as valuable today as it could be in five to 10 years, but I believe investing in any type of real estate requires patience. As I see it, in this case, you have a very nice margin of safety built into the stock price.

Less value
Other opportunities for investors looking at real estate in the South without actually having to buy property include Consolidated-Tomoka Land (AMEX: CTO  ) and Forestar Group (NYSE: FOR  ) .  Consolidated-Tomoka Land is actually an interesting play, as it's closer to profitability than St. Joe. Still, its 1.42 price-to-tangible book ratio almost triples the value given to shares of Avatar.

On the other hand, I wouldn't recommend touching Forestar Group with a 10-foot pole. While it's clear that the real estate recovery will take time and investor patience, I'd prefer to wait with a company that is not overleveraged with debt. Forestar Group's debt-to-equity ratio of 43 points to just the opposite, and is significantly higher than its peers. Should the economy begin to slow again, Forestar Group will find itself in a much tighter spot than its less-leveraged peers.

Strategies differ, effort exerted does not
I'm unwilling to bet against Einhorn's call on St. Joe, but Berkowitz compelled me to look deeper into the region to find even more value. I found Avatar, which is a better fit for my personal investing strategy of finding dirt cheap companies with a built-in margin of safety. These different strategies and theses will certainly produce different results, but I believe it is the research and effort that ultimately lead to investing success. While the winner of this battle royal is yet to be determined, both investors clearly have this part of the equation down.

Andrew Bond owns no shares in the companies listed. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.  

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  • Report this Comment On January 18, 2011, at 4:06 PM, MKArch wrote:

    - Berkowitz is on record as having said recently he would own JOE outright if he could.

    - He thanked Einhorn for allowing him to increase his stake in JOE at a time when he was just about maxed out based on his stand still agreement.

    - BlackRock has disclosed that they have added substantially to their JOE holdings recently.

    - Berkowitz had himself and his partner added to JOE's BOD a couple of weeks ago.

    - Rumors have surfaced recently that JOE will be taken out with Berkowitz name associated. This has sparked a sustained rally in the stock.

    - JOE announces they have voluntarily lifted the stand still agreement with Berkowitz and now he's free to own as much of the company as he wants. The language also refers to ownership with partners.

    I can see someone not being sold on JOE's prospects but it seems to me anyone betting on JOE's stock/ Berkowitz has the odds stacked in their favor.

  • Report this Comment On January 18, 2011, at 5:19 PM, MKArch wrote:

    <<<"Under the right circumstances, Fairholme would be happy to own the entire company," he said Tuesday. "St. Joe is a fabulous company. It's going to have a very bright long-term future.">>>


    I don't think self fulfilling prophecy is exactly the word but it's close enough.

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