News Out of PICO Holdings Picks Up, and So Do Its Shares

The 9% gain over the last two days in PICO Holdings Inc. (PICO)  may indicate that something finally is happening that will put money back in the pockets of shareholders. We've already been hearing about potential special dividends, tender offers and share buybacks for many months, but none have come to fruition.

However, PICO shares hit a 2 ½-year high on Monday after the company announced it had hired JMP Securities LLC to explore "strategic alternatives" that could include a sale of the company, merger or disposition of assets. Often when you hear such rhetoric, it means that a company is in trouble and there really are no viable strategic options. Such an announcement may inject some interest back into a stock, but may not bear any fruit.

Now along comes this morning's announcement that PICO is selling the 9% stake in Century Communities Inc. (CCS) that it acquired in an August deal where PICO's majority-owned subsidiary UCP Inc. merged with CCS.

In PICO's case, all this has been a long time coming, and the company has made several moves to get to this point, spurred by some activist investors. Long-suffering shareholders have lived through a lot of ups and downs with this company (I've owned shares on and off since 2003), which once traded in the $50 range.

However, strategic mistakes and management that was reaping rewards while the stock languished derailed it (pun intended -- when I first took a position the company owned 1.2 million acres of former Nevada railroad land, which it sold off over the years). It was also a difficult name for investors to understand, as management measured success not by earnings but by growth in book value. That was fine as long as book value was growing, but when it went the other way it became difficult for the company to justify its non-traditional method of measuring success, and those of us who bought the concept moved on until it was cheap enough to justify taking a new position.

At this point, including the sale of the CCS stake, PICO has amassed more than $150 million, or $6.50 a share, in net cash and short-term investments on its books.

However, the "crown jewel" and the only other major asset is the company's water resource company, Vidler, which has assets in Arizona, Colorado, Mexico and Nevada, including Fish Springs Ranch, and its 8,000 acre-feet of water credits. Exposure to water and water rights is what initially attracted me to PICO, although my expectations in terms of value were never met.

In addition, PICO had $162 million in net operating loss carryforwards as of June 30, which could be beneficial to an acquirer under the right circumstances.

It's hard to say with any degree of accuracy what this all might be worth. The big question is what Vidler might be worth; and what strategic alternatives the company will end up pursuing. When all is said and done, I don't believe that the mid $20s would be out of the question (the stock now trades around $18). Years ago, that would have been an insult.

At the time of publication, Heller was long PICO.