Doug Kass: My Top Stock Pick for 2025 Takes Me Back to 1992

I am always doing bottom up-analysis in the search for attractive long and shorts.

Ideally, especially with longs, I try to identify asymmetric opportunities in which upside reward dwarfs the downside risk.

If my and Praetorian Capital's Harris Kupperman analyses are correct, The St. Joe Co. JOE is a vivid example of the fruits of that search.

Back in 1992, while running the research and institutional equity departments at First Albany, I wrote the first sell-side research report on St. Joe Paper.

St. Joe is now my largest individual equity long... and my stock pick for the 2025.

Praetorian's Kupperman attaches a very high net asset value ($250/share) to this real estate company — compared to its current share price of $45.

What follows is a recent JOE analysis from my pal Kuppy:

Since I’m doing book reports this quarter, I want to briefly mention JOE, which comprised 12.5% of our capital at year-end, and was our third largest detractor on a Dollar basis. I tend to focus on hard assets with strong tailwinds, as those assets offer downside protection, with plenty of upside in what I believe to be an inflationary decade. JOE has both of these aspects in spades (tailwinds and asset value).

Let’s look at the tailwinds.

As JOE owns a disproportionate percentage of the undeveloped land in Southern Bay, Gulf and Walton Counties, in Florida, along with substantial business operations there, let’s discuss those counties’ growth briefly, as real estate is tied to population and economic activity. I believe that there is no better, nor cleaner metric for both population and economic growth, than the growth in passenger traffic at Northwest Florida Beaches International Airport (ECP). Since 2019 when 1,275,488 people flew through the airport, traffic is up by 30.1% as of 2023 when 1,660,479 people flew through ECP, with traffic up an additional 13.5% this year over 2023, as of November. Clearly, this is impressive growth, and it doesn’t even track the rapid growth of private planes, which tend to be core JOE customers. The Florida Panhandle is a rapidly growing part of the nation, and JOE is in the driver’s seat in terms of how it is developed. By developing it intelligently, JOE doesn’t only add value to each development, but they add value to their massive landbank and all future developments that they undertake. There is a real multiplier effect here and I think that many investors miss this.

As a value investor, I always ask myself what something is worth today, and what it can be worth tomorrow. Valuing JOE’s income producing properties is relatively easy. I can get deep into the math here, but for the sake of simplicity, let’s assume their existing business operations (including full and partial ownership in 12 hotels with 1,298 rooms, multiple multi-family and senior living properties with 1,383 units, 1,179,000 square feet of other commercial space, a clubs business, marinas and a bunch of other assets like self-storage, a gas station and a shooting range) are worth approximately $2 billion, net of the cash and debt on the balance sheet. Then, at the year-end market cap of $2.6 billion, you’re buying approximately 168,000 acres of land in Florida, much of it waterfront, for approximately $3,600 an acre, net of the commercial real estate. I can assure you that this is the wrong price. In fact, I think there’s a genuine agreement amongst investors that this is the wrong price—the disagreement is in regard to the correct price.

I like to think in terms of big numbers. If you assume the Net Asset Value (NAV) of the company today is between $200 and $300 a share, then you can work backwards and calculate that I’m valuing the land at between $57,500 to $92,200 an acre, if you assume that everything else on the balance sheet nets to $2 billion. Looking around at recent transactions on the County Clerk’s website, I have pretty good confidence that this range of outcomes is directionally correct and could be on the low side of things. Of course, JOE has plenty of acres that are worth less than $57,500, but they also have acres that are worth a few million each, which drag the average up rapidly. For the sake of argument here, let’s just accept that my math is correct, and using $250 a share as a midpoint of NAV is accurate.

Having lived in Florida for 17 years, I have seen land in Florida appreciate rapidly. Maybe not every year, and there were a few down years during the GFC, but for the most part, land in Florida, especially land near the water, appreciates rapidly. As a shareholder, I assume this remains the case as the population of Florida, and particularly Bay, Gulf and Walton counties grows. If you assume that this collection of land and operating assets appreciates at 10% a year, which would be roughly the sum of the percentage changes in population growth and the CPI in the counties where JOE has investments, then it would imply that the NAV should appreciate by $25 next year, before the company earns a cent from running their recurring cashflow businesses, or reinvests a cent into new development.

Once you add in about two dollars of anticipated cash flow each year, and some value creation on the development side, I feel pretty confident in saying that the NAV can appreciate by $30 next year. Given the year-end share price of $45, that would represent an appreciation of 67%, which is quite attractive in my book. Naturally, this isn’t a one-and-done situation—I expect this sort of NAV appreciation to be an annual phenomenon, though it will be somewhat lumpy and track the economic cycle to a certain extent. Of course, as we’ve learned repeatedly over the past few years, the returns for the stock and the returns for the NAV can remain divergent.

While frustrating to us in 2024, I’m trying to predict long-term value creation, and I remain confident that the shares will one day accrete towards NAV. I’ve had frequent meetings with management, who I think are excellent, over the four years that we have owned our shares. I’ve implored them to close this discount to NAV with buybacks, and they’ve done some occasional buybacks, but they’ve mostly focused on developing the land that they have. At first, I found this frustrating, now I’m more accepting.

Let’s return to the math again. Let’s say they had bought back $100 million of shares during 2024 at an average price of $50, or at 20% of NAV, that would have been incredibly accretive. They would have created $400 million of incremental NAV value for everyone!! Amazingly, there’s something else that they could do that would be more accretive. Imagine if they instead spent $100 million on building a new hospital (the first in the region), along with a new marina, town center, restaurants, etc., all amenities that retired people likely desire when they are researching about where to retire (JOE built all of these things in 2024). To be more accretive than buybacks, JOE would need to add more than $400 million in value to their land through these investments.

Do I think these improvements have added approximately $2,400 per acre in incremental value to the 168,000 acres they have ($400 million / 168,000 acres = $2,400)?? Of course!! Their land has probably appreciated by far more than $2,400 an acre. How can you sell high-end homes to retired people when the nearest hospital is over an hour away?? Even better, these amenities are going to produce cash flow, allowing the company to continue to reinvest at an even more rapid pace in the future. In summary, buybacks are nice, but developing property is even nicer, as we get added cash flow, value uplift on successful developments (trust me, that concrete and steel is worth a lot more than the $100 million they spent on it), and value uplift on the surrounding 168,000 acres as well. The problem with this is that while the stock market is usually correct over long periods of time, it is lazy and downright stupid over short periods of time.

Since we started buying shares of JOE throughout 2020 at approximately $20 per share, the shares have appreciated by 122%, but I feel strongly that NAV per share has appreciated even more rapidly. One day, this valuation gap will close, but without more aggressive buybacks, this may take some time.

As noted in the case of Valaris, I’m perfectly fine to be patient and wait for the market to notice what I take for granted. Of course, nothing is ever linear, and you may be wondering why the shares of JOE have performed so poorly in the last few months of 2024. I can point you to rising interest rates, a US housing slowdown (which doesn’t appear to have really impacted JOE) and other macroeconomic factors, but the primary cause of the price decline is JOE specific.

Funds managed by Bruce Berkowitz currently own 29.7% of JOE. These funds have continually sold shares, and that has capped the price of JOE over the past few years. When Bruce chose to resign as Chairman of the company, after a 13-year stint where he successfully oversaw the turnaround at JOE, shareholders panicked that his funds would accelerate their pace of share sales. I see this as a short-term concern. Shareholders periodically sell shares. The long-term business prospects are not impacted by this. I focus on the long-term here. If Bruce chooses to sell additional shares after they’ve already declined by approximately 30% from the 2024 peak, then that just seems like a buying opportunity for us, and the company, should they choose to become more aggressive on their buyback. As this book report is now getting quite long-winded now,

Here is Kuppy's complete letter to investors. Q4 2024 Investor Letter.

This commentary was orginally posted in Doug's Daily Diary on TheStreet Pro.

At the time of publication, Kass was long JOE; Short JOE calls.