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Buy When There's Oil In The Water
Baron Rothschild, an 18th century
British nobleman, is credited with saying, “The time to buy is when
there’s blood in the streets.” Fast forward to today, and one might
suggest that, “The time to buy is when there’s oil in the water.”
Crisis creates opportunity for the disciplined investor, and the
unfortunate disaster caused by the BP Blunder
has produced one of the most compelling long term values we have ever
come across. As they say, “ever” is quite a long time.
We recently watched a certain TV
personality jumping up and down, like Jo-Jo
The Idiot Circus Boy with a pretty new pet, and yelling at
his viewers to “Sell, Sell, Sell” The St. Joe Company (JOE) after the
stock had lost nearly half of its market capitalization in under two
months. Viewers were told, “I know it’s got a strong balance sheet. SO
WHAT! It may have acquired 477,000 acres of land in North West Florida
at a very low cost. SO WHAT! . . . The risk from the oil spill is no
longer a question of if, it’s not even a question of when. Now the only
question is how much is this going to hurt? Could it wipe out the
company??”
We’ll spare the suspense here and answer
that one right up front – not a chance. The St. Joe Company has
$39.5MM in debt, $27.1MM of which is offset by pledged treasury
securities, and $30.6MM in maturities after 2014. The company has total
liquidity of $286MM comprised of $164MM and $122MM of cash and credit
facilities, respectively. A strong balance sheet may not be of much
importance to speculators, but it provides long term investors with a
comfortable security blanket. Not to mention, the company has 577,000
acres of land, but what’s a 100,000 acres if you’re not interested in
the assets a company holds anyhow?
Later in the segment, the audience is
told that, “I am not saying this company is going to go bankrupt. It’s
probably not. That’s what I’m saying about BP.” We thought that last
comment was particularly interesting, considering that on May 3rd,
with BP trading over $50, our favorite TV personality explained that
“BP’s debt to capital is really incredible” and on May 10, he told
viewers that he was purchasing shares of BP for his charitable trust at
just under $50. “If you get any good news at all, you’re at the bottom.”
Which leads us to our next question –
why doesn’t the same hold true for JOE, a stock that is already selling
at half the price it was trading at less than two months ago, with ZERO
responsibility for the spill? Instead, viewers are told, “We cannot
quantify the downside.” While this is certainly the case for BP, who’s
costs and liabilities are rising by the day, anyone remotely interested
in buying discounted Florida property, and willing to take the time to
actually analyze the company’s assets, can “quantify the downside” in
JOE pretty easily. At a minimum, we can get a sense for what the stock
is currently pricing in. To help us determine the risk of a permanent
loss of capital, we ask ourselves a few straightforward questions when
considering any investment opportunity:
-
Is the investment within our Circle of
Confidence? Can we describe our thesis in one paragraph? -
Can we confidently estimate value in
relation to price? What is an appropriate Margin of Safety? -
Does the business have a moat? What
is the firm’s competitive advantage? -
Is the business run by honest and able
people? Is management an efficient steward of capital? -
What can go wrong? How much do we
stand to lose? -
Are we willing to invest a large part
of our capital in the business?
These questions form the foundation of
our investment thesis in The St. Joe Company, which is outlined below:
Buy
When There’s Oil in the Water (Jun-10)
Disclosure: At the time of publication, the author was long the
St. Joe Company (JOE), although positions may change at any time
»
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Great analysis.
not a fashion guru...but I do know that Oil is new black this season...
Listen- we're all going to be poor. At least for the next generation the movement is back to the cities and the public transport interchanges. In a decade we'll be back at 1 car per family.
St Joe look a smartly-managed company. If they can get major hi-tech production into the area, they have a future. If not, no jobs, no buyers.
Give that marketing guy a banana. Good effort son.
I've studied St. Joe before, and that managemedt team has a very long outlook on their investments. Most investors (including myself quite frankly) are not that patient. But they do know that time is their biggest ally-- and they certainly know the topology Florida.
I've seen hundreds of thousands of acres contaminated by lead. And you know what happened? The ones responsible for the cleanup (BP is today's example), had to scrape off 18 inches of contaminated topsoil and replace it.
The bad news is that if it's the worst case, BP will go bankrupt. The good news is that they will be the world's largest environmental disaster cleanup company-- they'll get plenty of capital on the IPO.
In any case, the ones who bought the land at firesale prices will eventually have appreciating land values. St. Joe can wait.
If your not depressed enough checkout the article referenced on Naked Capitalism on the very dangerous dispersant used by BP on the oil spill. The dispersant is 4 times as toxic as oil and has been banned in the UK and other countries. 1.5 times as much dispersant has been sprayed as the oil spill. The combination of the oil and dispersant will kill the GoM marshes and possibly humans. Why??
Come talk to us when the black Dippity Doo starts hitting Tampa Bay.
Maybe it will not wipe out the whole company, but from what I saw today (and over the past 3 years) from where I am sitting - in the powder keg to be exact - it looks pretty darn miserable. Half developed multi-million dollar projects that have been sitting half completed for years. Golf course communities that were private are now public (with 0 (ZERO) lots developed around it). Land that will be literally worthless for many years cause of America's Chernobyl. They might not go under, but they got one heck of a shot at becoming the next GSE! Well, what won't be a GSE at this pace? No fing way do I touch this with a hazmat suit on (they are all over the beaches picking up oil right now). You may get a HFT/Bot related pop, but that will be it from what I see. Rumor has it their claims will save them, hell, BP might as well just become a subsidiary of St. Joe if that is the case. Oh, yeah, good luck at getting those claims processed in a timely manner.
Who is this guy?
The only thing that concerns me is the high institutional ownership. Last years March buyers haven't been "washed" out...so I know who would be selling ;-)
I live in Fla. their holdings of land are huge. It was started by the DuPont family if memory serves.
Putting it back on the radar...thanks for the post...maybe teens I'll nibble.
Bitchez St. Joe!!
Wait until they nuke the well, crater it, and let ALL the oil out of the field in one guolp.That's right, one monster guolp. Then mix in a couple hurricanes and the entire Gulf coast will be painted shades of black. nice.
http://www.realclearmarkets.com/video/2010/06/28/clinton_blow_up_the_wel...
"A lot of the fishermen around here will tell you that the fish never came back,''
says Vega Morales. "They'll say, 'Oh, in the old days, you could catch fish with your hat, it was so easy.' That's how we are, always talking about the one that got away. But the truth is, after maybe nine months or so, it was back to normal.''
Soto, who followed the fish and shrimp population off Mexico closely, found to his surprise that for most species the numbers had returned to normal within two years.
"The catastrophic effects that everybody's looking for, those are mostly limited to the first months,'' he says. "Then you start looking in subsequent months, the long- range view, and it all diminishes. The pollution effect becomes more and more difficult to find ...It's like a radio signal, when you're close, it's strong. But when you start moving away, the signal starts to fade.''
Even the physical evidence of the spill quickly began disappearing. Tunnell has been visiting Mexico regularly for 30 years, mapping the spilled Ixtoc oil on the country's beaches and coral reefs.
different beast - that spill was close to the coast and didn't fuck up the whole food chain
I believe it blew for about a year. Oil was on the beaches over 600 miles away in Texas. You believe it only went north south and stayed close to shore? And that would not harm the food chain? that is a notable conclusion.
Oil bitches!
Superb Tommy Boy reference. Bravifrickinissimo.
I am not buying a damn thing...
http://kunstler.com/blog/2010/06/say-what.html
No hurry to buy just yet. Lots of oil left in the gulf. A huge CRE shoe left to drop and a double dip to navigate as well. Not worried at all about the JOEs out there getting away any time soon.
Seems there was a oil company that substantially overstated it's reserves awhile back casting a pall on management as the market slashed a substantial chunk off it's share price. I'm not saying BP's overstated their reserves, but one has to look at the history of what comes out of the lips of BP's management and wonder what else of substance they have told us that bears no relationship with reality that could push the share price downward with out any rest stops for profit taking.
Of course there's always people who feel compelled to take large positions in "good" companies that are simply "misunderstood" because they feel they have done a better job of gaming the outcome in the hopes that they too will be on the cover of the Rolling Stone of investing. I've always wondered why they would publish this incredible opportunity when they could quietly accumulate large amounts of shares much closer to the single digits confident in their knowledge that the market will soon find out it's made a horrible mistake and still get on the cover of the Rolling Stone of Investing with gorgeous women and a smile of satisfaction without saying a single word or showing a logo that reminds me of the killer cigarettes I quit 11 years ago with the hope I did it in time so I won't have to suffocate to death.
I'm not saying that it's this particular tout that may kill me prematurely, but I am saying I won't take that chance.
Thanks anyway.
Have you calculated the value of the land after it's been soaked by a highly toxic oil-dispersant laden rain? (Is this why you ask if your investment has a moat around it?)
My mind is boggled by all the avenues by which people could make claims against BP. Any child with a birth defect born in the next 20 years near the gulf? Every person who works on the clean up and later starts developing strange symptoms that trial lawyers give a name to, say, Dirty Gulf Syndrome. Home about people about to sell property, but the deal falls through because buyer not interested in an oil-soaked beach front. Lets say the economy was turning south anyways, but any loss by any business is blamed on BP.
Why take the risk. This is worse than (Breast Implants times Asbestos times Cigarettes) squared.
what if the oil disperant was alcohol, or worse compressed air and BP kept those facts secret to preclude later lawsuits from chemical contamination (other than from crude oil)?