Berkowitz's Contrarian Bet: Real Estate and Energy Infrastructure in Q1 2025

Bruce Berkowitz, the renowned value investor behind the Fairholme Fund, has long been a contrarian force in markets. His latest portfolio moves in Q1 2025 underscore his willingness to double down on undervalued sectors when others retreat. By shifting focus to real estate through The St. Joe Co. (JOE) and energy infrastructure via Enterprise Products Partners LP (EPD), Berkowitz is betting on a recovery narrative for industries that have faced prolonged headwinds. This article dissects the rationale behind his allocations, evaluates their risk-reward profiles, and assesses whether investors should follow suit.

The Pivot: From Caution to Conviction in Q1 2025

Berkowitz's Q1 portfolio adjustments mark a stark reversal from his Q4 2024 strategy, where he reduced allocations to financials and trimmed exposure to Energy Transfer LP (ET). By contrast, Q1 2025 saw him increase stakes in St. Joe Co. (JOE) to 78% of the portfolio and boost Enterprise Products (EPD) to 15%, while cutting positions in banks like Bank OZK (OZK). This reallocation reflects a belief that real estate and energy infrastructure—both beaten-down sectors—are nearing a valuation bottom.

The risk-reward calculus here is compelling:
- Real Estate (St. Joe Co.): With a market cap of $2.71 billion, St. Joe Co. operates in Northwest Florida, a region poised for sustained growth. Its diversified revenue streams—including homesite sales, commercial leasing, and hospitality—offer stability.
- Energy Infrastructure (Enterprise Products): As a midstream leader, EPD benefits from long-term contracts and cash-generating assets, insulating it from short-term commodity price swings.

The Case for Real Estate: St. Joe Co.'s Value Proposition

St. Joe Co. is Berkowitz's largest holding, and for good reason. Its Q1 2025 results highlight a turnaround:
- Revenue grew 7% to $94.2 million, driven by a 15% rise in homesite closings and record leasing revenue of $16.3 million.
- Free Cash Flow (FCF) per share hit $0.40, up from $0.31 in Q1 2024, with a TTM FCF of $1.17 per share. This signals improved capital efficiency.
- Diversified income: Leasing and hospitality now account for 59% of revenue, reducing reliance on cyclical homesite sales.

However, risks linger:
- Geographic concentration: Over 90% of assets are in Florida, exposing the company to regional economic downturns or climate risks.
- Debt management: While St. Joe's debt-to-equity ratio improved (to 28% of total assets), rising interest rates could pressure margins.

Energy Infrastructure's Steady Hand: Enterprise Products' Resilience

Enterprise Products' Q1 2025 performance reinforces its role as a cash machine for the fund:
- Adjusted FCF of $1.05 billion reflects stable operations, even as capital spending rose to $1.1 billion for growth projects.
- Distributable Cash Flow (DCF) coverage of 1.7x supports its 3.9% distribution hike to $0.535 per unit.
- Operational momentum: Permian Basin volumes surged, with natural gas processing hitting 7.7 Bcf/day, driving NGL Pipelines & Services margins up 8%.

Yet, challenges remain:
- Commodity price exposure: While midstream contracts are generally fee-based, a prolonged downturn in oil/gas could strain counterparties.
- Regulatory risks: Infrastructure projects face permitting hurdles and environmental scrutiny.

The Contrarian Play: Why Now?

Berkowitz's timing aligns with two key themes:
1. Sector undervaluation:
- Real Estate: St. Joe Co. trades at a P/E of 7.8x, below its five-year average of 12x, despite strong FCF growth.
- Energy Infrastructure: EPD's 4.4% dividend yield and 15x P/E reflect investor skepticism about energy demand.

1. Macro tailwinds:
2. Inflation moderation: Lower interest rates could revive housing demand in Florida.
3. Energy transition: Midstream assets remain critical to U.S. energy security, even as renewables grow.

Risks and Caution Flags

While the thesis is compelling, concentration risk cannot be ignored. The Fairholme Fund's top two holdings account for 93% of the portfolio, leaving little room for error. A misstep in either sector—or a broader market sell-off—could amplify losses.

Additional concerns:
- St. Joe's liquidity: Its cash balance of $94.5 million is modest relative to a $435 million debt load.
- Enterprise's capital demands: Its $4.5 billion 2025 capex plan could strain margins if projects face delays.

Investment Recommendations

For long-term value investors, selective exposure to Berkowitz's picks makes sense, but with position sizing discipline:
1. St. Joe Co. (JOE):
- Buy if: P/E contracts further to 6.5x, signaling a market overreaction to near-term risks.
- Avoid if: Florida's housing market weakens or debt costs spike.

1. Enterprise Products (EPD):
2. Hold for the dividend: The 4.4% yield is secure, but capital appreciation hinges on energy sector stabilization.
3. Watch: Permian Basin volumes and DCF trends through 2026.

Conclusion

Berkowitz's Q1 2025 pivot to real estate and energy infrastructure is a classic contrarian move—a bet that beaten-down sectors can rebound when fundamentals improve. While the risks of extreme concentration are clear, the value multiples and cash flow resilience of St. Joe and Enterprise Products justify cautious optimism. Investors should follow Berkowitz's lead but temper their exposure to these picks, using dips to accumulate positions for a multi-year horizon.

As always, value investing requires patience—and a stomach for volatility.

Disclosure: This analysis is for informational purposes only and not a recommendation to buy or sell securities. Consult your financial advisor before making investment decisions.