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Great Minds Can’t Save a Company Destined to Fail

By    |   Thursday, 10 Feb 2011 01:05 PM

This is one of the most exciting stock brawls in recent memory. The battle is over a small company named St. Joe Co., a Florida real-estate developer.

At an investment conference in late 2010, famous hedge fund manager David Einhorn announced he was short the company. He thought the company, which was trading at $25 a share at the time, was worth closer to $7 to $10. Einhorn's main thesis is that the land St. Joe owns is worth far less than the company values it at. The stock fell by 10 percent by the end of his 40-minute presentation.

Einhorn stated in late 2007 that he was short Lehman Brothers. In 2002, he stated he was short Allied Capital. Both companies completely collapsed in 2008. Einhorn's hedge fund, Greenlight Capital, has returned 30 percent annually since 1996.

What makes this story really interesting is that 30 percent of shares of St. Joe are owned by another famous investor, Bruce Berkowitz (making him the largest shareholder). Berkowitz manages Fairholme Capital Management, which has approximately $20 billion in assets. Berkowitz was named the domestic-stock fund manager of the decade by Morningstar. Berkowitz's fund returned approximately 13.2 percent a year during the decade.

There have been some startling changes in the company that have come out over the past few days. Berkowitz is trying to make himself chairman of the board. “I have said in the past that I would like to buy the whole company,” he said.

In addition, the company has hired Morgan Stanley to “consider the full range of available options, including a revised business plan, operating partnerships, joint ventures, strategic alliances, asset sales, strategic acquisitions and a merger or sale of the company.”

Now what makes one wonder is why is the company exploring a sale if Berkowitz wants to buy the whole company? This is likely a situation where Berkowitz realizes there is trouble with St. Joe and is trying to take a more activist role to shape the company up.

However, even the best investors or CEOs can‘t always push a bad company back in the right direction. Warren Buffett tried this tactic with a company that Berkshire Hathaway owns called USG. Buffett one of the greatest capital allocators ever yet hasn‘t had success to date.

Ironically, Buffett stated in the past that "when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Buffett means that even great management can‘t turn a bad company around.

It will be very fascinating to see how the rest of the story plays out.

(Author disclosure: The author of this article owns no shares of any company or fund mentioned in this article)

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This is one of the most exciting stock brawls in recent memory. The battle is over a small company named St. Joe Co., a Florida real-estate developer. At an investment conference in late 2010, famous hedge fund manager David Einhorn announced he was short the company. He...
jacob,wolinsky,Great,Minds,Save,Company,buffett,st joe,land,battle,real-estate,berkowitz,einhorn
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2011-05-10
Thursday, 10 Feb 2011 01:05 PM
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