A battle royale of sorts has broken out between two highly respected equity fund managers over the value of real estate developer The St. Joe Co. (NYSE: JOE). David Einhorn of Greenlight Capital highlighted the reasons he is shorting shares in the company at the recent Value Investing Conference. His 139-slide presentation was greeted with applause -- and a huge drop in the share price of St. Joe.
Meanwhile, Bruce Berkowitz, who runs Fairholme Capital Management, is St. Joe's largest shareholder, with a 29% stake. His response to Einhorn: "If we were able, we would buy the whole company. I want to send him a box of chocolates. This is the kind of advertising you just can't buy. The company should hold a David Einhorn Memorial Investment Week." Berkowitz put his money where his mouth is by adding more than 135,000 shares to his already very large stake.
One of these renowned managers has to be wrong. Which will it be?
The combatants
David Einhorn, no stranger to controversy, really made a name for himself by taking on Lehman Brothers. In April 2008, while many were still bullish on the investment bank, Einhorn began shorting shares of the company and in May publicly questioned then-CFO Erin Callan's handling of a private equity investment's value. She stepped down two months later, and we all know the final end game for Lehman Brothers.
However, Einhorn isn't just a short-seller. His value investing style has been extremely successful over the years. We recently learned he really enjoys bagels, or at least bagel maker Einstein Noah Restaurant Group (Nasdaq: BAGL), in which he holds a 65% stake. Einhorn's largest two holdings are CIT Group (NYSE: CIT) and Pfizer (NYSE: PFE).
Berkowitz is a deep value investor and loves buying shares in beaten-down companies. He believes in making very large bets in a few stocks, which is not a popular investing method among his mutual fund colleagues. But it's hard to argue with his track record of 13% average annual returns for Fairholme during the past decade. Aside from his large bet on St. Joe, Berkowitz is invested heavily in U.S. financial stocks, including AIG (NYSE: AIG), Citigroup (NYSE: C), and Goldman Sachs (NYSE: GS) .
The battle
Berkowitz believes that St. Joe, which is Florida's largest private landowner, has extremely valuable property that has been underdeveloped over the years. He cites a lack of transportation options for those looking for second homes as one cause for the lack of development. However, the company donated 4,000 acres to be used for an airport within one of its large development areas.
Berkowitz was not the only person excited about the airport; St. Joe President Britt Greene dubbed the excitement "The Southwest Effect," noting that the airline's presence was a "game changer for the entire region."
Einhorn disagrees. He said that only one of the airport's seven gates is even able to accommodate a 737 plane, which is the only kind Southwest flies. In addition, the company is now trying to sell very undesirable real estate that went unused in the areas directly surrounding the airport.
More important to his bearish thesis, Einhorn believes that almost all of the company's best properties near the beach and other amenities have been sold. The majority of the other properties in the region are either owned by speculators who bought before the housing bust, or the banks that have foreclosed on these properties. With such a large amount of inventory, St. Joe will be competing for a long time with these sellers.
In addition, Einhorn showed those who attended the conference videos and pictures of deserted towns and empty lots that the company owns but has yet to develop as supply is already too high and demand too low. Einhorn showed one whole community that was so empty, he just called it a "ghost town."
Final thoughts
It's amazing that two extremely smart and successful investors can have such a difference of opinion on a stock. However both sides have compelling evidence to support their thesis. Whichever side of the fence you're on, be sure to check out Einhorn's thought-provoking presentation, and form your own opinion.
Berkowitz vs. Einhorn: Whose side are you on? Let us know in the comments box below.
