Housing Blues Hits Billionaires

Suppose you heard that an investment whiz, a billionaire, owned a cheapie stock, one at less than $5 a share that trades on the New York Stock Exchange. Would you take a shot on it?

Okay, let's take the issue one step further. Suppose two other investment stars, also billionaires, owned that very same stock. Would you then take a flier? Probably yes, correct? Billionaires don't achieve that exalted financial status by doing stupid things.

Our three billionaires are an activist investor who is Corporate America's most feared troublemaker, Carl Icahn; Wall Street's most successful trader, Stevie Cohen, who heads up S.A.C. Capital Management in Stamford, Conn., and a managing director of Neuberger & Berman, Marvin Schwartz, who is viewed by some professionals as the "pro's pro."

Given the great success of this trio, common sense would suggest that the stock in question merits serious consideration. Stockbroker Malcolm Lowenthal of Kern, Suslow Securities probably sums it up best: "With three guys as smart as these all owning big stakes in the same company, how can you possibly not be interested? The answer is you have to be." Few investors would challenge such an obvious assumption, but they should because the stock — WCI Communities, a leading Florida home builder with 2006 sales of $2 billion — has been an absolute dog. All three billionaires have lost money on their investments. Over the past 52 weeks, the Bonita, Fla.-based firm, which constructs retirement communities on Florida's coasts and high-rise residential towers, has plunged to a 52-week low of $3 from a 12-month high of $24.20. It currently trades at $3.01.

Granted, Florida is riddled with overbuilding, foreclosures, rapidly rising inventories, and falling prices — a deteriorating situation that many real estate experts say is likely to get progressively worse in the state before it gets better. The bullish contrarian view — which no doubt is what our billionaires are thinking — is that the industry at some point, perhaps starting late next year, will begin to turn around. Maybe so, but some real estate pros believe a realistic turnaround in Florida housing is unlikely until 2010 at the earliest.

Mr. Icahn owns 14.5% of WCI Communities. Early this year, the company put itself up for sale. Mr. Icahn made a bid at $22 a share, an offer WCI rejected. A follow-up effort by Mr. Icahn to gain support through a tender offer also failed. In June, the company said it had received no offers and rebuffed Mr. Icahn again. In late August, WCI and Mr. Icahn ended their feud. The following month, WCI took itself off the market and named Mr. Icahn chairman. As for WCI's two other billionaire holders, Mr. Cohen owns 7%, while Mr. Schwartz holds a 5.3% stake.

What do our billionaires have to say about their lemon? Alas, none could be reached for comment, although Mr. Icahn has said publicly he's in the stock for the long run. WCI officials didn't respond to phone calls seeking comment.

Veteran real estate developer Robert Sheridan, who heads up Chicago-based Robert Sheridan & Partners, is unimpressed with the billionaire holders, having recently told me he thinks "it's crazy for anyone to own a home builder's stock, especially one focused on Florida, where housing is fast going from very bad to even worse." Mr. Sheridan is hardly alone in his bleak assessment, as is evident by a substantial and rising short interest (a bet a stock price will fall) in WTC shares. Latest numbers show a hefty short position of 24.5 million shares, up from 23.6 million the month before. A huge amount of the company's floating supply, 72.3%, is short.

"The way the stock is acting, the company looks like it's on death watch," one short seller said.

A Banc of America Securities analyst, Daniel Oppenheim, is one of a number of homebuilding analysts who takes a dim view of WCI, which is awash in red ink. In its most recent quarter, WCI reported a loss of $1.66 a share, much greater than Street expectations, in large part due to higher charges. Liquidity issues are likely to increase, Mr. Oppenheim warns, citing a deteriorating cash flow outlook. The company has reported it is not in compliance with its fixed-charged covenant and the analyst expects lenders to be less flexible in renegotiations, given the deterioration in Florida. Even if a favorable income is reached, WCI will have just $210 million in liquidity, which Mr. Oppenheim believes will quickly erode.

Even billionaire investment geniuses blunder. So don't blindly follow the investments of billionaires, because if they pick wrong, like they did in WCI, you could follow them to the poorhouse.

dandordan@aol.com