A Top Mutual Fund Manager’s #1 Contrarian Bet on Florida Real Estate

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
[house in a shopping cart]

With the constant flow of hurricanes streaming through Florida, you’d expect investors to think twice about investing in Florida real estate.

That is not the case with Miami-based investor Bruce Berkowitz. Bruce Berkowitz has bet the farm — that is, close to 50% of his portfolio — on a single stock, The St. Joe Company (JOE).

Whenever a top investor bets big on a single position, I take note. After all, that investor must have put in hundreds of hours of work into examining the opportunity. And by betting so big, that investor also put his reputation on the line.

Even by these lofty standards, however, the size of Bruce Berkowitz’s bet on The St. Joe Company stands out.

The Roller Coaster of Bruce Berkowitz’s Career

Berkowitz joined the pantheon of top investors in the late 1990s and early 2000s. In 2010, Morningstar named Bruce Berkowitz the U.S. stock fund manager of the decade, beating out the likes of Bill Miller, Ken Heebner and Tom Marsico.

Berkowitz’s Fairholme fund had generated a 10-year annualized return of 13.2% through the end of 2009. The average return of a comparable mutual fund over the same period was 0.01%.

How did Berkowitz do it?

Berkowitz avoided the technology boom and bust of 2000. Pre-financial crisis of 2008, Berkowitz made big, profitable bets on energy and defense. Post-financial crisis, he made a fortune in financial stocks like American International Group Inc (AIG) and Bank of America Corp. (BAC).

A fawning article titled “The Mega Mind of Miami” in the December 10, 2010, edition of Fortune magazine marked the height of Berkowitz’s investment reputation.

It has been a rough ride for Berkowitz ever since. Berkowitz’s massive bets on real estate assets like St. Joe and Sears Holdings Corporation (SHLD) have yet to pay off this decade.

Since 2011, Berkowitz’s Fairholme Fund has lost 89% of its assets due to poor performance. With $2.2 billion in assets, the Fairholme fund is just a fraction of its $20 billion former size. Berkowitz himself is now the fund’s largest client.

Berkowitz has been unapologetic for Fairholme’s poor returns. He always has promised his investors ultra-concentrated, often contrarian bets and high volatility. And he certainly has delivered on that front.

The St. Joe Company — Berkowitz’s Biggest Bet

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Berkowitz has said that if he could only invest in one of his positions, The St. Joe Company (JOE), a Watersound, Florida-based real estate developer and manager, would be it. Putting his money where his mouth is, Berkowitz has invested a whopping 48.67% of the Fairholme Fund in the company. Berkowitz recently raised his stake in St. Joe on July 14 by 1.37% when he bought 343,428 shares for $18.55 per share.

That’s a daring move, even for a committed contrarian like Berkowitz.

That’s because St. Joe has been a dud investment over the past decade. After hitting a high of $81.54 at the peak of the real estate boom in June 2005, shares of St Joe have fallen sharply. Today, shares trade at around $19. That’s the same level the stock traded at in February 2009, and a level that it first hit in January 1994.

St. Joe (JOE) Stock Price since March 1992

St. Joe currently owns over 120,000 acres across the Florida Panhandle Region from the international airport (ECP) to the Gulf of Mexico in Florida. St. Joe has the rights to build 120,000 homes and millions of square feet of commercial resort and club properties at zero land costs.

The company, however, has long had massive potential given the size of its land holdings alone. Those sizable holdings have made the stock a “value trap” over the last 30 years.

So what makes St. Joe a better opportunity today?

Since Berkowitz became a shareholder in late 2010, St. Joe has streamlined its real estate and forestry operations by 50%. It has reduced its corporate expenses by 35%. It has sold off 380,000 acres of non-strategic timberland and rural land for $562 million.

Today, St. Joe is investing in projects that generate recurring revenue through joint ventures, new programs and projects. And as chairman of St. Joe’s Board of Directors, Berkowitz has promised that every new St. Joe project must be profitable from day one.

St. Joe recently built a 137,000 square foot facility and leased it to GKN plc, a London-based automotive and aerospace components company. Strategically located next to the region’s airport, GKN may be just the first of many high-tech companies that will move to northwest Florida. See www.venturecrossings.com.

Much of St. Joe’s land is located near Northwest Florida Beaches International Airport. This newest U.S. international airport just saw over 1,000,000 travelers per year for the first time. Berkowitz expects that number to explode as airlines establish additional direct routes from New York.

St. Joe is also building rental apartments, townhomes and condominiums. The company is putting up 240 units in a joint venture with HomeCorp near Pier Park. See www.watersound.com.

Finally, St. Joe is working to improve the quality of education and health care in the region. New schools will focus on the “STEM” areas: sciences, technology, engineering and mathematics. St. Joe is in talks to expand the health care system in the area. The company is also working hard on a large biomedical engineering project.

Active project management, combined with a strategic pruning of non-performing assets, is showing up in St. Joe’s financial results. After years of losses, the company has been profitable in each of the last five quarters. Most recently, St. Joe reported second-quarter 2017 net income per share of 15 cents, well ahead of the prior-year-quarter figure of two cents. Analysts recently increased both third-quarter and full-year earnings estimates significantly.

Berkowitz believes that St. Joe has at least 30 years of organic growth ahead of it. As Berkowitz has said, “To outperform in sports, you must go to where the ball will be — not where it already is. The same is true of investing and our investment in St. Joe.”

Just don’t expect a steady ride.

P.S. St. Joe Company (JOE) is the most recent recommendation in my monthly investment service, Smart Money Masters. This service is where I recommend the latest and best “smart money” picks just like this one.

The current Smart Money Masters portfolio includes Warren Buffett’s, George Soros’ and hedge fund manager Bill Ackman’s top investment bets. One recommendation follows a strategy that is beating Buffett at his own game. You can read about it here.

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