Real Money Buy: I'm Doubling Down on This Big Winner

One of the biggest mistakes that investors make is cutting their flowers and watering the weeds; in other words, cashing in their winning investments too early, and adding to their losers in hopes to get back to even. In this case, I'm planning to do the opposite by increasing the size of my position in one of the best performing picks for the Total Realty Portfolio. Following this article, I plan to double my position in real estate developer Howard Hughes (NYSE: HHC  ) , which is up almost 70% since my original purchase last September. Howard Hughes continues to report solid results, and with every passing quarter, I become more convinced that I'm partnering with a smart management team that will be creating value for shareholder for years to come.

Why I'm buying more
When I first picked up shares of Howard Hughes, it was trading at a 20% discount to book value and looked to be a screaming deal. Now that shares have rallied this year, it may not be screaming, but it still looks like a deal at 1.2 times what I believe is a significantly understated book value. There continues to be mounting evidence based on a recent divesture and land values used to negotiate joint venture terms that substantiate this thesis -- not to mention management's consistent assertions to the same effect.

Over the last three quarters, Howard Hughes has released a tremendous amount of good news surrounding its various properties. A few examples include:

  • The company's two master planned communities (MPC) in Houston, Texas, The Woodlands and Bridgelands, are seeing healthy demand for new homes. Also, office space in the commercial areas of the MPC is filling up fast because of the booming energy market and ExxonMobil's (NYSE: XOM  ) decision to relocate 2000 employees from Virginia to its new headquarters being built near The Woodlands.
  • In the distressed Las Vegas market, there are finally signs that the market is bottoming, and demand for home lots in the Summerlin MPC is improving. Macy's (NYSE: M  ) has signed on to be the first anchor tenant for the future Shops at Summerlin retail development, which should help attract more retail tenants.
  • Howard Hughes has finally received approval for its plans to redevelop the South Street Seaport in Manhattan, and construction is slated to start in July of 2013.
  • Development is proceeding as planned on the company's Ala Moana property in Honolulu, which management believes could ultimately be worth more than the current market value of the entire company.  

Foolish bottom line
As an investor in the company, I'm pleased with how Howard Hughes is operating, and I continue to be impressed by both the company's management and its ability to attract new talent. Howard Hughes continues to be one of my favorite long-term holdings, and I don't plan to make the mistake of anchoring to the considerably lower price of my first purchase. Howard Hughes' stock may cost more today than it did a year ago, but we have considerably more information about the value of the assets, the strategy for redeveloping key properties, and the abilities of the management team, which in my mind makes the decision to buy more even easier today.

You can follow Jeremy on Twitter at @TMFTotalRealty.

Jeremy owns shares of Howard Hughes. Jeremy is an analyst for Motley Fool Hidden Gems, a premium small-cap investing service. The Motley Fool owns shares of ExxonMobil and Howard Hughes. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On October 01, 2012, at 7:53 AM, foolishdave wrote:

    in your fourth point you indicate that hhc's ala moana property may ultimately be worth more than the current market value of the entire company. i believe that general growth properties owns ala moana shopping center and that hhc only owns some air rights at that location.

    you may be thinking of hhc's 60 acres in honolulu at ward's center. i believe that is the development which may ultimately be worth more that the current market value of the entire company.

    i'm long hhc and consider it a core holding in my ira's.

  • Report this Comment On October 01, 2012, at 10:46 AM, TMFTank wrote:

    @foolynaround

    You're correct. I was referring to the Ward Center where HHC has a approval to build 4500 condo units and over $1 million square ft of retail space. In a recent investor presentation, management said that those condo units would be about 1000 square ft a piece, and that similar units have been selling nearby for $1000 - $1300 a square foot. They expect to earn about 30% margin on those units, so you're looking at a profit of about $1.4B to $1.8B, and that's without including the retail and land values. Obviously, there's no way to tell how accurate those numbers are, but they seem to leave a decent margin of safety.

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