The Rude Awakening
Wall Street, New York
Thursday, July 13, 2006 ------------------------- - Turning fallow fields into cash crops – one company
you can cash in on,
- What do you do when the going gets tough?
- The big guns in computers take the plunge, all the
week's data and plenty more...
------------------------- Eric Fry, reporting from the eye of a financial
thunderstorm... When the going gets tough, the tough get going...or at
least that's the traditional macho response to adversity.
But the macho response is not always the prudent response.
Looking for a place to hide is often the better course of
action. Lately, the U.S. stock market has been subjecting investors
to some very tough times. The broad market averages are
struggling to keep their heads above water, while former
icons like Dell and Intel are all sinking like stones...or
old PCs. 
[Source: Bloomberg] During times likes these, therefore, a hiding place isn't
such a bad thing to find, especially if that hiding place
happens to offer some exceptional long-term growth
opportunities. That's exactly the sort of hiding place that
Chris Mayer presents in today's column. Chris is the editor
of Capital & Crisis, as well as the editor of the newly
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-------------------------
The Way to San Jose
By Chris Mayer When California became a state in 1850, San Jose became its
first capital. As the city flourished, its demand for water grew as well.
Sensing an opportunity, an enterprising individual by the
name of Donald McKenzie assembled some investors to acquire
the rights to supply the city with water. The year was
1866. Such were the humble beginnings of today's SJW Corp. (NYSE:
SJW). The company now serves over one million people in six
cities. The company claims it is the "most technically
sophisticated urban water system in the United States." But SJW is more than just a water utility; it is also a
significant landowner. But let's look at the utility
operations first. San Jose Water operates in the heavily regulated state of
California, which is probably not a good thing. In the
past, public utilities have struggled to obtain rate
increases. However, Governor Schwarzenegger has made
utility-friendly changes to the California' Public
Utilities Commission (CPUC). If recent cases are any
indication, utilities will have an easier time raising
rates. Over the last few years, SJW has produced a steady increase
in earnings per share and dividend growth.
But the real reason SJW stands out is for its land
holdings. SJW owns an impressive portfolio of commercial real estate
and undeveloped land. The company owns 7,000 acres of
watershed in the Santa Cruz Mountains, which includes about
1,000 acres of timberland. It also owns warehouse
properties in Florida and Connecticut and retail property
in Texas. SJW acquired most of its land holdings during the
19th century. So its cost basis on these holdings is
absurdly low. But a low-cost basis is not always a good thing. If SJW
sold its land outright, it would owe hefty taxes on the
sale. Richard Roth, the President & CEO, estimates this
could be around 42% of the proceeds. That's why the company
usually monetizes its land holdings through a 1031
exchange. This mechanism allows the company to roll the
sales proceeds, tax-free, into another similar investment. Specifically, SJW sells its land and buys water assets – as
well as income-producing property around the country. SJW
has already produced some stellar returns out of its land
holdings. Recently it sold 5.5 acres to Adobe systems for
$25 million. That's about $5 million per acre. This one
sale netted more for than the company in 2005 than the
company's core water utility business, which netted $21. Naturally, such a sale perks up the ears of investors.
Asked more about the company's land holdings, Roth declined
to get specific. He did say, "We have some nice investments
there." And he hinted that perhaps further disclosure on
the company's real estate holdings would be forthcoming,
especially since the company's real estate business
contributes a much larger share of the company's value. Who knows exactly what SJW could eventually reap from its
collection of land and properties? The enterprise value of
the company today is only $550 million. So, it wouldn't
take a very large real estate transaction to boost that
number significantly. The sale to Adobe alone represented
nearly 5% of the value of the company. SJW's property portfolio is like a hidden bank account. As
Roth says, "We know that when the right opportunity comes
along, we have the capital to fund it." Their land and real
estate is like a bank they can dip into to buy water
assets. They don't have to raise debt and they don't have
to sell more stock. They are converting non-income
producing land into income-producing assets. These strategies are the added kicker that spices up an
otherwise fine utility. This is a long-term holding, not likely to double
overnight. But if it gets close to the 18% annual gain
utilities have enjoyed over the last 10 years or more,
you'll surely have a market-beating winner...or at least a
good place to hide. [Joel's Note: There is always someone making money in the
markets. It's true, even when the rest of the market is
telling you the prudent thing to do is to locate a safe
place to hide, special situations present themselves where
you can still make wise investments. Chris Mayer
specializes in identifying such situations for his readers.
Rather than miss out on the action all together, why not
check out Mayer's Special Situations reports and pocket
some dough along the way. His latest report is yours to
read right here: Mayer's Special Situations
http://www.isecureonline.com/Reports/MSS/EMSSG712
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net you 300% gains this year - guaranteed! http://www.isecureonline.com/Reports/MSS/EMSSG731 ------------------------- 
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