Monday, May 11, 2009

Forbes Article on Land Rich Companies:FCE/A JOE and TRC/Need more Work for the Next Bear Market on Using Volatility to Choose Double Short ETF Hedges

In this week's Forbes, there is a favorable article about land rich companies like St Joe and Tejon Ranch that RB recently added to the portfolio.   Forbes.com   My discussion of St Joe can be found at this post.   FED Buying up to 300 Billion in Treasuries/Buy 50 of DDT/Nibbled at ST JOE/Sold a Couple of International Lease Bonds/Oracle    I make mostly the same points in favor of buying shares at $15.69 that the author of the article makes for purchasing shares at $24.   I still own those shares in spite of the cryptic comment made by RB the other day to trade land for water, which was interpreted to mean, sell St Joe and use the proceeds to buy more PICO.   Notwithstanding the vision thing from RB, LB is most likely to add to PICO at some point and to keep JOE for a double and hopefully a long term capital gain.  

The author of the article in Forbes claims that 90% of the 586,000 acres of land owned by St Joe is within a few minutes of the Florida Panhandle beachfront.  Of those acres, 49,000 acres have been "entitled", meaning cleared by the local authorities for development. The problem is the housing crash in Florida.   Eventually, the seasons change and the good times will roll again. RB  does not understand Alan Abelson, how can anyone be so pessimistic forever.

Tejon ranch is a similar story with 30,000 developable acres near Los Angeles, currently valued at around $15,000 an acre based on the stock price.  Tejon also has 240,000 acres of land in a conservation land trust which allows it to farm, ranch and prospect for oil).  

The author was also positive on Forest City, though less so, a heavily indebted real estate company.  I used to own the common stock in a retirement account but sold it somewhere over $40.  I have been around real estate people all my life, and I have yet to see how high leverage  works in an economic downturn, let alone one caused by a credit meltdown and an implosion in some of the largest financial firms.   It is best not to over think these kind of issues.  At some point, possibly soon, the common may become a buy again.  For now, I am hiding in a small position in FCY, a senior debt issue.  Forbes says the debt is around 8.9 billion with assets appraised last year at 11.5 billion.  I would place far more emphasis on the hard debt number than the appraisal figure.  Who knows what it is worth until you have to find out the hard way?  I did think Karen Finerman was too pessimistic on Forest City when I watched her talk about it on Fast Money. Seeking Alpha
Some of my earlier discussions about Forest City can be found at:

I found last year that the double short ETF for the Russell 2000 (TWM) worked as a better stock hedge than the one for the S & P 500 (SDS), though that conclusion is just based on some personal observations from 2008 mostly.  I was using both SDS and TWM in 2008.   It appeared to me that TWM had more bang for the buck, and that appeared to result from the Russell 2000 having a higher level of volatility compared to the S & P 500, a conclusion confirmed by comparing the CBOE volatility indexes RVX for the Russell 2000 and VIX for the S & P 500.   The RVX currently stands at 41.9.  So I was using TWM some last year even though I had eliminated most of my small cap position, as I was experimenting with using volatility models with the double short ETFs as a hedge.  I did okay with it, but I need to do much better next time.   I will try to focus more on using the double short for the most volatile index and the index considered the most vulnerable based on valuation and/or other considerations.  That was the financial index in November 2007 and Nasdaq in 2000.  Double shorts exist for both indexes and I did buy them in the November 2007 to August 2008 period.

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