How To Bet On Berkowitz And St. Joe

Not one to ever take an activist role, value investor Bruce Berkowitz found himself doing just that as the largest shareholder in Florida real estate company, St. Joe (NYSE:JOE). Through his investment vehicle, Fairholme Capital Management, Berkowitz amassed nearly 30% of St. Joe over the past couple of years. As the economy slowly moved out of the recession, Berkowitz remained steadfast in his commitment to the company, despite no meaningful recovery in the stock price.

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Enter Einhorn
Fairholme's passive stance changed when hedge fund manager David Einhorn of Greenlight Capital disclosed that his firm had taken a short position in St. Joe. Since it's inception in 1996, Greenlight has amassed a excellent track record shorting stocks. Not all have been winners, but the considering the company's excellent overall track record, Einhorn and company have clearly been right more times than they have been wrong. Most recently, Greenlight was very successful in its short selling campaign against Lehman Brothers. Before that, they successful shorting insurer MBIA (NYSE:MBI). Einhorn's excellent book, "Fooling Some People All of the Time" (2008) is a great recount of Greenlight's campaign against business development company Allied Capital (NYSE:AFC). Any serious investor should give this book a read.

Goliath Vs. Goliath
Both Einhorn and Berkowitz are titans in the investment world. Both have amassed extraordinary long-term track records, a clear signal that both have been more on the right side of a trade than the wrong side. While the jury is still out on which investor will ultimately prevail in the case of St. Joe, now that Berkowitz and his team are the company's Board of Directors, St. Joe has a legitimate shot of doing well. Even so, it won't be a quick or easy path for Berkowitz. It could take years to unlock the value, if any. Recently, Berkowitz has succeeded by buying what few other wanted to touch, most notably AIG (NYSE:AIG).

As a result, betting on St. Joe and the Berkowitz team may be most prudent via a long-term call option on the stock. Currently, St. Joe shares are trading for $27. Berkowitz is not getting involved because he feels shares are worth $30. If the turnaround at St. Joe is successful, shares will likely be worth significantly more than they are today. An investor can make this bet by buying the January, 2013 $30 call options, which today trade for $2.45 a contract.

If ,by January 2013, St. Joe shares are trading below $30 (ignoring commissions for simplicity), the option expires worthless and 100% of the investment is lost. If shares in St. Joe are trading above $32.45, your gain will be the difference between the stock price and $32.45. So, if Berkowitz succeeds and Joe shares trade for $38 in two years, the options will be worth $8, more than triple the $2.45 you paid for them.

The Bottom Line
Using a long-term call option on St. Joe requires less upfront capital than simply buying the stock. Of course, as with all options, the possibility for 100% capital loss is magnified. Be sure to understand the risks and the payoff scenarios before engaging in any options trade. (For related reading, see Call Option Basics.)

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