After a stellar 2017 with a gain of 64%, Arquitos Capital Management had three rough years ending with negative returns. Steven Kiel, the CEO of Arquitos points out this trend as inevitable. He argues that even the best-performing investors including Buffett, Ackman, Munger and Bill Miller all endure rough patches.
It all shows that in investing having a long-term perspective is essential. The fund was back on track in 2021. Kiel also mentioned that the reasons for the fund's overperformance in 2016 and 2017 were the same which caused the underperformance in the next three years.
Factors in choosing a specific company to invest in include a proactive management team and a discount on an estimated value of the stock.
Steven Kiel was featured in the Q3 2021 issue of Hidden Value Stocks on Hedge Fund Alpha making a recommendation for a St Joe Company stock (NYSE: JOE).
Factors For Choosing St Joe
Kiel started off by pointing out that St Joe was put in the spotlight of many investors due to the involvement of Bruce Berkowitz from Fairholme Capital. He has been on the board of directors of JOE for some time and it has been a big part of his portfolio.
However, Kiel was reintroduced to St Joe through his friend Harris Kupperman from Praetorian Capital. St Joe offers from a high-level perspective investors an opportunity to profit from migrations to Florida.
The company has incorporated several elements into a good long-term strategy, including Florida’s no-tax status, the chance of significant inflation, and overall strong operations.
While Kiel notes that it is always difficult to predict the future price move of a stock, in the case of JOE he simply recognized the value of the company. From his point of view in the next five-year window there is a lot of potential for upside.
St Joe operates several business divisions including timber, leasing, real estate, and hospitality. The main influx of capital comes from developing land and selling it to homebuilders.
From St Joe's management, it can be heard that they can sell up to 1,000 lots per year, however, some other estimates show a potential to reach a figure of 2,000. When looking at figures from 2020 an average revenue per sold homestead was $124 thousand.
From that figure, the company gets about 60% gross margin so it is easy to imagine how this investment can be very interesting and lucrative. From Kiel’s perspective, the company has the potential to work and generate gain for the next 100 years minimum.
Asking the question can JOE’s management capitalize on all that developmental potential would be missing the point. The management is already creating a surplus, but the better question is can they utilize the huge runway they have in front of them?
During 2020 the number of homesteads sold was on a constant rise, which was followed by the rise in the revenue per homestead. Another potential big contributor to the company’s gains is their leasing division. It has yet to flourish but with the senior living units being leased, there will be a chance to grow this segment of operations.
Timber Market Volatility
The timber sector of the company has sustained the volatility of timber prices. Despite the downturn in timber value, Arquitos sees potential in that sector of the company. In any case, the timber element of the company doesn’t take a major part of the operations and cannot bring too much harm.
When looking at timber prices and their dynamics since 2021 it has certainly lost some of its value. In parts of 2021 and 2022 timber prices ranged between $800 and $1,300 per 1000 board feet which was a solid value.
However, from mid-2022 the price stabilized in a price range between $400 and $600 with the market not showing potential for significant improvement.
Management Track Record
Bruce Berkowitz is a long-time chairman, and despite his somewhat flawed investment approach, he knows how to allocate capital. JOE has great returns on capital and is planning for a share buyback backed up with a small dividend release.
Another big piece in the success puzzle of the company is Jorge Gonzales who is the CEO. Gonzales reads the market and the investor sentiment allowing him to make the right decisions. He and Berkowitz have been working together for years and they showed good teamwork.
What is interesting in the case of JOE stock is that there is not much public float out there despite Fairholme owning a major part of the stake in the company. It is often seen from other examples on the market that these conditions can often lead to quick movements in the share price.
Estimating Real Estate Value
Kiel’s sentiment is that the stock is fairly valued to the current operational results. However, there is a big runway going forward and it provides growth for every sector of the company besides timber.
In case of a growing inflation, the gains could be fueled up. The best approach the company can take is to continue doing what it already is. As a result, the shares have the potential to be sold at several multiplies from the position where they are traded now.
Deciding to determine the stock value by looking at metrics like book value doesn’t cut it in JOE’s case. Identifying the land value that the company owns and then adding multiple to their earnings can more precisely offer a value estimate.
Since the company at the moment was at a growth phase potential significant positive outcome was to be expected. Another factor that adds to this sentiment was the price which was at a low end of the range. These characteristics point out to a potential long hold that brings positives in the prolonged period until it becomes overvalued.
Analysis
When looking at the price when the interview was held stocks gained ~28% in value and moved from ~$43 to $57. The company's success was recognized in 2023 when it received an award for the multi-brand developer of the year in the Hilton Americas Development Awards.
When assessing the five-year performance of the firm it is clearly seen that the long-term benefits are overwhelming. In the period between 2018 and 2023, the stock price gained 257%.
Also, in the last decade, annual earnings per share of the company managed to increase by 7.5%. This figure is still lower than the share price value growth of 28% per year. This points to the conclusion that the market holds a higher value of the stock than it did five years ago.
When looking at the Q1 2024 report there are a lot of positives including the growth of revenue by 20% from the same quarter in the last year. Net income was also significantly increased reaching $13.9 million (a jump of 34% when compared with Q1 2023). Earnings per share is also following this rising trend, showing growth from $.18 to $0.24 in the last year.
During May the stock value did stumble by 5.3% but that didn’t show any sign of real weakness of the company. Its ROE is 11% which is efficient fuel for growing future earnings. This figure looks even bigger when compared to 5.2% ROE which is the industry average.
High ROE is not a good enough metric if it is not followed with effective usage of the company's earnings. When looking at a three-year median payout on a moderate 27% level, while retaining an impressive 73% of its income. These figures show that JOE is widely reinvesting its capital resulting in a significant growth in its earnings.
Performance stalled during Q2, resulting in a lower revenue (by 13% compared to Q2 2023), and income (down 29% from Q2 2023). Earnings per share also stumbled from $0.60 in Q2 2023 to $0.42. However, during July shares gained 5% in value erasing that loss during May.
We also analyzed their latest annual report which did show several encouraging signals.
Hospitality revenue in 2023 exceeded the company’s total revenue from 2016, despite last year not being a full working year for five new hotels.
The company also reduced corporate expenses when looking at a percentage of consolidated revenue, from 24% in 2016 to 6% in 2023. Another crucial piece of information is that the company sold 1,704 homesites and home sales during 2023, which is a close prediction that Kiel made in 2021.
