market folly

Over the past two days, shares of the St. Joe Company (JOE) have plummeted almost 20% largely spurred by David Einhorn's bearish presentation on JOE at the Value Investing Congress. Amid the torrential selling, Bruce Berkowitz's Fairholme Capital was buying.

According to a 13D filed with SEC regarding St. Joe, Fairholme now owns 29.0% of the company with 26,891,820 shares. Berkowitz purchased 135,600 shares on October 13th and some of you may be wondering why he didn't buy even more shares given the huge drop. Well technically, he really couldn't.

Berkowitz entered into a standstill agreement with the company in April 2009 that caps his ownership stake at 30%. So given his current 29% stake, he doesn't have much wiggle-room to buy more. The standstill agreement expires in April 2012 and interestingly enough, it prevents Berkowitz from hedging his position.

Due to the publicity surrounding Einhorn's short thesis on JOE, the value of Berkowitz's position in the company has decreased by over $100 million. In Einhorn's presentation, he mentioned that he attempted to reach out to Berkowitz to discuss the investment but hadn't heard back. St. Joe has now become a battleground stock.


Berkowitz's Thesis

JOE has attracted the eyes of many value investors in the past. At the Value Investing Congress West back in May of this year, Berkowitz mentioned that he thought he purchased the stock for swamp land prices. He highlighted the quality of the land, the fact that it is the last 'open' land left in Florida and that the new airport will help spur interest. The embedded video below outlines his thesis (email readers will need to come to the site to watch the video):




Einhorn's Thesis

Some of you might recall that this isn't the first time Einhorn has shorted the company. Back in 2007, Einhorn laid out the bearish case for JOE at the Ira Sohn Conference. Back then, his valuation pegged JOE at around $15 per share. In fact, Jonathan Heller of CheapStocks exchanged dialogue with Einhorn about the position three years ago and posted up Einhorn's 2007 thesis on JOE.

Fast forward to today and you can compare it with his in-depth JOE presentation from the Value Investing Congress. This time around, the Greenlight Capital fund manager feels St. Joe is worth $7-10 per share if they convert into a rural land company. He feels St. Joe needs to take impairments and has clearly monitored this company for quite some time.


Battleground Stock

So, Berkowitz versus Einhorn. Ding... Round 1. Einhorn has certainly struck Berkowitz where it hurts with his publicized presentation. Some investors will argue that the first 10% the stock fell is more-so attributed to who was presenting the short idea (Einhorn) rather than the idea itself (JOE). After all, Einhorn has found great success with some of his shorts in the past (Lehman Brothers anyone?) But then again, shares of JOE fell an additional 10% the next day so clearly some investors are concerned.

Given the fact that Berkowitz owns 29% of the company and is locked in a standstill agreement that prevents him from hedging, it's pretty safe to say that he's in this for the long haul. We'll have to wait and see if he responds to Einhorn and whether or not he does so privately or publicly. The investing community waits with bated breath.

*Update: Berkowitz has apparently pseudo-responded to Einhorn via his comments to Reuters. Berkowitz said that, "If we were able, we would buy the whole company. I want to send him (Einhorn) 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." When asked if he had responded to Einhorn, Berkowitz said, "Why would I want to talk to him? If someone wants to lower the price of a product I'm buying, I'm okay with that. We're long-term investors here."

Taken from Google Finance, St. Joe Company is "a real estate development company. The Company owns approximately 577,000 acres of land concentrated primarily in Northwest Florida. St. Joe is engaged in town and resort development, commercial and industrial development and rural land sales. It also has interests in timber."

Be sure to check out all of our coverage from the Value Investing Congress where you can read about presentations by some of the top hedge fund managers in the game.