The market is often an anonymous place where you don't really know who is on the other side of your trade. Sometimes, however, it gets personal.

One such example is the showdown between hedge fund manager David Einhorn and mutual fund manager Bruce Berkowitz over the St. Joe Company (NYSE:JOE), i.e., Einhorn has been shorting the stock while Berkowitz has been acquiring shares in the Florida-based real estate development company.


Einhorn is someone who shouldn't be taken lightly.

On May 15, 2002, he famously gave a speech that alleged illegal accounting practices in Allied Capital that inflated asset values. On the very next day, Allied shares opened 20 percent lower. Eventually, Allied shares traded at $5 (from over $30) before it was sold to Ares Capital.

On May 21, 2008, Einhorn gave a damning presentation on Lehman Brothers, criticizing it, among other things, for questionable accounting practices and heavy exposure to toxic assets. In September 2008, Lehman went bankrupt.

Although market chaos at the time contributed to its demise, so did the issues Einhorn raised. The subsequent report by Lehman's bankruptcy examiner revealed greater fraud than perhaps even Einhorn had  anticipated.

On October 13, 2010, he gave a negative presentation on St. Joe. He accused it of improperly valuing its assets and having an unprofitable business model, among other things, and St. Joe shares plunged afterwards.

The sequence of events with St. Joe is eerily similar to his takedown of Lehman and Allied, which probably fueled the sell-off.


Bruce Berkowitz is another highly successful fund manager.

He was Morningstar's domestic-stock fund manager of the decade for the 2000s because he consistently outperformed the market during that period.

Berkowitz is known for being a contrarian value investor who stress-tests his investments by trying to "kill the business." This, combined with his excellent track record, suggests his investments are probably solid bargains.

Before his tangle with Einhorn, Berkowitz bought a large stake in American International Group (NYSE:AIG), the maligned insurance giant that received billions of bailout money from the government and was largely owned by Uncle Sam as a result.

Back in April 2010, hedge fund manager Steve Eisman (who foresaw and profited from the subprime mortgage crisis) gave a bearish speech on AIG. He argued that the fair value of AIG's equity was either negative or $7 per share in a better-case (but less likely) scenario.  As AIG shares fell after Eisman's presentation, Berkowitz added to his long position.

By the end of September 2010, Berkowitz owned 24.4 percent of AIG's outstanding stock.

Since Eisman's speech, AIG shares have soared 70 percent to $58 per share.

So far, Berkowitz is winning big time on this one.

St. Joe

Berkowitz has long held St. Joe shares. He became embroiled in the current battle with Einhorn when he bought an additional 135,600 shares after the latter's speech caused St. Joe to initially plunge 20 percent.

Since then, the SEC has launched an informal inquiry into St. Joe's accounting practices.  Two days later, St. Joe's board decided to terminate the standstill agreement that prevented Berkowitz from owning 30 percent or more of the company.  Currently (January, 12 2011), St. Joe has actually rallied above the  'pre-Einhorn' price.

The standstill termination will allow Berkowitz -- who already owns 29 percent -- to take an even larger stake in the company.

If Berkowitz's company Fairholme Fund pushes past its current 29 percent stake, it's conceivable that it, along with other larger shareholders like BlackRock (NYSE:BLK), would buy up remaining shares at a premium and take the company private.  (Berkowitz previously told Reuters he would buy the whole company if he were allowed to.)

In fact, chatter of a takeover helped St. Joe shares recover from the initial Einhorn drop.

Einhorn, however, dismissed the takeover idea as "very tough to do" and not making any sense because St. Joe has no cash flow.

Einhorn and Berkowitz have been talking publicly about their respective (and opposing) investment theses on St. Joe.

Berkowitz said the Florida-based company "has uniquely valuable assets and some of the most attractive, concentrated and well-managed real estate in the U.S."

He earlier asserted on Morningstar that St. Joe's land holdings in Florida are highly attractive. The Northwest Florida Beaches International Airport, which opened on May 23, 2010 "right dab in the middle of St. Joe's land," will serve as a "catalyst" for St. Joe, he added.

"We like the idea that we bought the swamp prices. The company has no debt, has some cash, is patient, [and] understands the possibilities," said Berkowitz.

He also said St. Joe "should more be a liquidating trust [than a publicly traded company and] a private real estate family would love to get their hands on this company [and be kept] busy for 50, 75 years."

Regarding Einhorn's shorting of the stock, Berkowitz told Reuters he wants to "send [Einhorn] a box of chocolates" for bringing free attention (advertising) to St. Joe.

St. Joe "should hold a David Einhorn Memorial Investment Week," he said.

Einhorn's side of the story is mostly from his detailed October 2010 presentation.

In some ways, he agrees with Berkowitz.

He said the company's land development business is unprofitable and further development is likely to destroy additional value. The best move, said Einhorn, is for St. Joe to become a rural land company.

Where Berkowitz and Einhorn likely differ is the valuation.

While Berkowitz did not disclose his valuation, he likely thinks it's worth at the very least $17 per share, which was the low made after Einhorn's presentation.

Einhorn thinks it's worth about $7 to $10 per share.

Moreover, Einhorn said St. Joe's management spends $50 million a year running the company (an amount which management says it won't reduce). To fund this expenditure, St. Joe needs to sell 25,000 to 40,000 acres of rural land each year. Einhorn said the company can continue this exercise for only about 15 years before land runs out.

He said when the real estate boom ended in Florida (and the whole country), management "distracted investors for several years" with the aforementioned Northwest Florida Beaches International Airport story.

However, he said the airport doesn't benefit St. Joe too much financially.

Now, St. Joe management is trying to distract investors with the suing BP for the Gulf spill story, all the while claiming on its website that "St. Joe beaches have been fortunate to experience minimal tar balls", said Einhorn.

Like his previous takedown of Lehman and Allied, Einhorn also accused St. Joe of questionable accounting practices that overvalued impaired assets.


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