By David Pinsen
Founder of Launching Innovation, LLC

As I mentioned in a previous article, although my gut feeling is bearish right now, my gut doesn’t have a great track record at market timing. Because of that, I’ve started putting cash to work in market neutral trades every couple of weeks. For today’s market neutral trade I shorted St. Joe Co. (JOE) at $17.99 and bought an equal dollar amount of Getty Realty (GTY) at $29.03.

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I had bought puts on JOE last June, as I noted on Short Screen’s message boards at the time, and sold them for a 39% profit in October, after David Einhorn presented his updated short case for JOE at the Value Investors Conference. As I blogged at the time, Einhorn’s take down was brutal. Market Folly has the audio of Einhorn’s presentation, along with the slide show that accompanied it here. If you’re pressed for time, just listen until he gets to slide #11 and the crowd erupts in laughter.

Einhorn’s short case for JOE, in a nutshell, is that the company’s rural, Florida panhandle land costs more to develop than it’s worth (he estimates the company’s rural land, the bulk of its assets, is worth $7-$10 per share). The problem for bulls who believe that this land will be worth a lot more in the long term is that JOE’s management has to sell tens of thousands of acres of it every year to cover its $50 million annual operating expenses. So it may not have any land left if and when Florida has another real estate boom.

Audit Integrity gives JOE an Accounting and Governance Risk (AGR) score of 34, on a 100-point scale, which puts it in the “Aggressive” category.

Insiders have been net sellers of JOE over the last three months, though net buyers over the last 12. The most prominent insider is the biggest institutional holder, Bruce Berkowitz’s Fairholme Fund.

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JOE had been on my radar screen since last month as a short candidate for a real estate market neutral trade, but I had trouble finding a candidate for the long side. After not finding anything attractive among real estate management companies, I started looking at REITs and found Getty (GTY), which mainly owns gas stations. GTY has fairly low leverage for a REIT and currently yields 6.5%. It was one of the REITS Alan Brochstein mentioned in his recent Seeking Alpha article, 9 Obscure REITs Yielding More Than 5% With Low Leverage.

Audit Integrity gives GTY an AGR score of 79, on 100-point scale, which puts it at the high end of the “Average” range.

There have only been a few thousand shares of GTY traded by insiders this year, but they were buys.

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Disclosure: Long GTY, Short JOE

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