Stock boosters should work as hard as cynics

October 13, 2010

Shorts just seem to try harder. Consider David Einhorn, the fund manager famous for his prescience about Lehman Brothers. The Greenlight Capital founder has gone negative on Florida real estate outfit St. Joe. His presentation — running 139 pages, more than St. Joe’s annual report — shows the thesis has been tested. If only bulls always dug as deep.

St. Joe’s market cap is only around $2 billion after investors dumped more than 10 percent off its value after Einhorn’s speech at a high profile investment conference. The Greenlight boss must be confident if he has put his money where his mouth is and bet big against the fortunes of such a relatively small company.

Einhorn reckons property is massively overvalued on St. Joe’s books. An owner of nearly 600,000 acres of land in Florida’s northwest, the company turned into an ambitious developer in the boom years running up to 2007. Einhorn argues the best of its land has been sold and further development is uneconomical. He believes the shares trade at up to three times the value of its assets and that it must gradually sell acreage to cover its hefty costs. If true, that would suggest shareholders will, over time, be left with nothing.

This thesis could be the result of an abstract and subjective calculation. But the Greenlight crew has marshaled an impressive collection of maps, land records, photos and even a video to bolster its analysis. Einhorn called some of St. Joe’s developments “ghost towns,” noted entire streets of houses for sale, and found a well-appointed golf course that was completely empty on the day his team visited.

Such hands-on due diligence is commendable, and unfortunately rare. Einhorn could be wrong. But it’s a fair bet that he has done more digging than the four analysts recorded by Thomson Reuters, whose recommendations on St. Joe run upwards from “hold” to “buy”. Moreover, approaches to the company and its biggest investor, Bruce Berkowitz’s Fairholme Capital Management, went unanswered, according to Einhorn.

Einhorn makes both long and short bets. But as Lehman showed, a detailed short case from a serious investor should be examined, not dismissed — and certainly not attacked with investigations and bans on short-selling, as happened back in 2008. The management of the company concerned might do well to engage, too. To overcome the cheerleading majority, lonelier cynics usually do more work, and their insight makes markets more efficient for all.

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