market folly

Below you'll find an in-depth presentation from Broyhill Asset Management on an intriguing way to play the Gulf oil spill from an investment standpoint. Hedge funds like Whitney Tilson's T2 Partners are buying oil giant BP (you can see their in-depth analysis of BP here). Others are buying drilling companies such as Transocean (RIG), Noble (NE), and Ensco (ESV). Broyhill, however, takes a slightly different approach. Their presentation "Buy When There's Oil In The Water" presents the bullish investment case for The St. Joe Company (JOE).

As you'll see in the presentation, the case for St. Joe starts with the fact that they own numerous real estate assets along the Gulf coast of Florida (assets that unfortunately could possibly be in danger from the oil spill). Christopher Pavese, Chief Investment Officer of Broyhill outlines St. Joe's competitive advantage in their near-zero cost of land. He writes, "Its massive scale and low-cost basis is impossible for other developers to replicate, making JOE the partner of choice for all development activity in Northwest Florida."

Broyhill is a Family Office that was started to manage the assets of Paul H. Broyhill and has since evolved into a multi-pronged investment firm. We've previously detailed commentary from Broyhill's Affinity hedge fund with their contrarian bet on long-term treasuries. Additionally, we've covered their ten reasons to buy bonds. And now below, we'll detail their hedge fund's latest investment idea.

Aside from its real estate assets, JOE has a pristine balance sheet with tons of cash and practically no interest-bearing debt, a much 'leaner' cost structure compared to prior years. A true investor often models and examines the worst case scenario for a given company. Broyhill has done just that, outlining a scenario where no one is really ever interested in JOE's land. In such a case, they estimate the stock is worth $15 (JOE currently trades above $25), assuming the land is sold for a paltry $2,000 an acre. To put this in context, consider that Leucadia recently paid $80,000 per acre in the same region.

The key for this company is monetizing their assets and the assumption that they will be able to do so. This play obviously requires patience on the investing end and Pavese highlights that St. Joe already has some near-term catalysts already lined up. However, as the oil spill nears St. Joe's properties, the stock has become more volatile. Broyhill argues that JOE's volatility leads to opportunity. Embedded below is the full in-depth presentation on The St. Joe Company (JOE) from Broyhill Asset Management:



You can download a .pdf copy here.

So while many other hedge funds and investment managers target oil companies as a proxy for oil spill plays, Broyhill has taken a roundabout approach. And, they aren't alone in this investment either. Bruce Berkowitz's Fairholme Fund has St. Joe as one of their largest positions and has for some time. So while Pavese fully acknowledges that JOE is a slow and boring story, he is confident this unfortunate oil spill has presented a fantastic opportunity for the long-term. For more from Broyhill's Affinity hedge fund, head to their contrarian bet on long-term treasuries as well as their ten reasons to buy bonds. Stay tuned tomorrow as we'll be covering their latest market commentary as well.