May I Sell You Some Florida Real Estate?

04/29/2008 12:00 am EST


Mark Fightmaster

Financial Analyst, Schaeffer's Investment Research, Inc.

Mark Fightmaster, editor of Schaeffer's Daily Contrarian, says courageous contrarian players may want to test 'a cup of Joe', but continuing real estate woes may dampen their enthusiasm.

The Barron's article I found yesterday focuses on land-development firm St. Joe (NYSE: JOE). The first 2 paragraphs of the article deal with the company's problems, but then focus on the fact that some prominent value investors have taken large stakes in JOE. One of the value investors is Third Avenue Management, which argues that JOE is "well positioned to rebound once the market turns". The article notes that the "bull case is that a debt-free company that owns 700,000 acres . is on very solid ground". That debt-free company is JOE. Michael Winer, portfolio manager of the Third Avenue Real Estate Value Fund notes that JOE is "in a great position to take advantage of the growth in the market place when that occurs. I don't think it's a question of if it's going to occur".

The article also notes that JOE had entitlements for 38.559 residential units that are being developed or are in pre-development and 12.3 million square feet of commercial land ready to go. Here is the key word, folks: Whenever these properties are sold, "they'll be extremely profitable for St. Joe because the parcels were bought 70 or 80 years ago for a song and still are carried on the company's balance sheet at prices below market value".

Contrarian Takeaway: Yes ladies and gents, we are dealing with potential again. The problem is that we are discussing a company that deals with real estate in Florida. If families are worried about rationing their cash to pay for gas and food, I can't see JOE making a lot of money on Florida homes. Apparently, neither can option players, as JOE's Schaeffer's put/call open interest ratio (SOIR) of 1.96 is at a 52-week high. In addition, 5 of the 6 analysts following JOE rate it a "hold" or worse.

Theoretically, JOE faces quite a bit of pessimism, which could unwind and push the shares higher. Yes, there is a lot of pessimism, and it may take a tidal wave of optimism to help the stock, as it has lost 28.5% during the past 52 weeks. The equity has not closed above its 10-month and 20-month moving averages since August 2005. Yes, the shares have rallied recently, but they have run headlong into the 45 level and their descending 20-month moving average. While there is potential good news on the horizon, the article itself notes that it could be 2010 before the real estate market will recover.

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