investing

Lessons From a Stock Pick That Gained 5,200%

If you really know a company's value, you can relax no matter how high the stock goes.

I never thought I’d own a stock that appreciated 50-fold. Until I decided to write this column, I kept mum about my coup. I didn’t want to brag, sell the shares or visit a Ferrari showroom. I had no worries that my 50-bagger would shrivel to a measly ten-bagger, or, even worse, a no-bagger due to greed, neglect or both. To my surprise, despite the stock’s amazing rise in just five years, holding on to it didn’t make me anxious at all.

The stock is Howard Hughes Corp. (symbol HHC), which was spun off from General Growth Properties (GGP) in 2010. I bought shares of General Growth in May 2009 at $1.25 apiece while the company was in bankruptcy reorganization. I sold them two years later for $16.25, making it a 13-bagger. But I held on to most of my initial Hughes shares and, in fact, bought more at the time of the spinoff. Both were good moves. The stock, which closed at $143 on April 30, has quadrupled since the spinoff. In sum, my gain on General Growth plus the value of my Hughes shares equal 52 times what I paid for the former. Today, Hughes accounts for 8.4% of my hedge fund’s assets and 14.2% of my personal accounts.

Perhaps the most important lesson from my 50-bagger is that it’s crucial to have a good sense of a company’s value. That helps steady my nerves when stocks plunge, as they invariably do. Occasional nose-dives in Howard Hughes shares haven’t exactly made me happy, but they haven’t ruffled me, either. (Alas, as a hedge-fund manager, I’m often very ruffled. I yearn to have Warren Buffett’s calm, but I don’t.)

The value of Howard Hughes lies in terrific real estate assets it owns in Honolulu, New York City, Houston, Las Vegas and Columbia, Md. Even before the company finishes upgrading the mall at New York’s South Street Seaport, the neighborhood is being touted as one of the hottest places in town. I think Hughes is worth at least $200 per share today, and it will probably be worth $250 by the end of 2015. Over the ensuing five years, the company’s value could continue to grow at double-digit percentage rates. Its management is excellent and creative. The CEO, the chairman and a director have increased their stakes in the past year; no insiders are selling. If the stock were to fall to $100, I’d buy more.

Now, if Howard Hughes were a tech stock, I wouldn’t be so sanguine. You can’t be mellow with tech. Competition and the risk of obsolescence are daily worries. Property prices can implode, too, but over time real estate has proved to be a good store of value.

My equanimity about Hughes has made me want to roll better with Wall Street’s punches. So I reviewed my fund’s portfolio and concluded that 82% of my assets are in stocks so undervalued that they should inspire a Buddha-like calm. The remaining assets are in companies with favorable potential returns relative to their risks, although the stocks could cause a lot of grief if my thesis turns out to be wrong.

Other key takeaways. First, the Wall Street adage that “pigs get slaughtered” shouldn’t drive your decision-making. Sure, greed can be bad. But it isn’t greed that has kept me in Hughes. It’s the belief that the stock is still a terrific bargain. Second, with value stocks, it’s dumb to use stop-loss orders, which trigger automatic sales once a share price falls to a preset level. They can shake you out of a stock at precisely the wrong time. A stop-loss order can be costly if it gets you out of a big future winner prematurely.

I have no price target for Howard Hughes. What will I do if it becomes a 100-bagger? I’ll sell at least one share so I can say to my future grandchildren that, once upon a time, I bagged a really big one. And then I’ll calmly keep the rest of the shares or sell them, depending on what I think the company is actually worth.

Columnist Andrew Feinberg manages a New York City–based hedge fund called CJA Partners.

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