by Alyssa Oursler | October 2, 2013 1:23 pm
JCPenney (JCP) announced a surprise secondary offering of JCP stock last week — a desperate move that doesn’t seem to have provided the flailing department store any relief.
Instead, JCP stock plunged on news of the offering.
On top of that, shareholders and lawyers are now circling JCPenney with class-action lawsuits, saying JCP knowingly misrepresented its liquidity.
That’s just the latest piece of bad JCP news, and all the more reason for investors to stay away from JCPenney stock.
Law firm Johnson & Weaver, for one, announced a JCP investigation last Friday. The firm noted that on Aug. 20, JCP’s chief financial officer said, “Certainly as we look through the end of the year, the $1.5 billion of liquidity that we have projected, we’re not assuming that we need any additional financing.”
Other senior management members have made similar comments, with CEO Mike Ullman allegedly saying — and this has been denied by some — that JCP wouldn’t need to raise liquidity just before the secondary offering intended to do just that was announced.
The results included this awesome headline courtesy of Forbes writer Agustino Fontevecchia: “JCPenney Announces Equity Offer Hours After CEO Ullman Denies Need To Raise Capital.”
And now, news of the first JCP lawsuit.
Alan Marcus sued JCPenney yesterday, and is seeking class-action status for shareholders from Aug. 20 to Sept. 26 — a timeframe during which JCPenney stock lost around a quarter of its value.
As Reuters reported, Marcus “accused JC Penney of knowing it did not have enough liquidity to get through the holiday season without raising new capital … (but JCP) concealed this knowledge so as not to raise concern among vendors.”
That meant “JC Penney stock traded at artificially inflated levels,” to use Marcus’ own words … and that JCP stock subsequently came falling back to earth when the truth about the company’s liquidity came to light.
Of course, class-action lawsuits aren’t necessarily rare in the investing world. Zynga (ZNGA) was hit by lawsuits in summer 2012 for supposedly failing to warn shareholders about sliding user and revenue growth, and has been hit by several since.
A lawsuit against Netflix (NFLX) alleging the company concealed threats to its business and sales growth was recently dismissed as well. And a similar fate awaited a lawsuit against Hewlett-Packard (HPQ) and its former CEO Mark Hurd.
But some, including Tyler Durden financial blog Zero Hedge, seem to think JCP stock investors have a pretty solid case. In fact, his response to the question of whether JCPennney made a securities violation in its representations about liquidity and the need to raise cash was simple:
“The answer: yes. The only question is who is guilty, and how much the settlement will be for all those who lost cash on the second most active trading day of JCP stock in history.”
Add this to the laundry list of reasons why you should pass on JCP stock — something I noted just more than a week ago, right before JCPenney stock began its most recent downward slide.
That sentiment for JCP stock was echoed by Oppenheimer analyst Brian Nagel recently as well, with Nagel adding that there is “no clear floor for shares” and that his firm recommends that folks “remain on the sidelines.” Plus, top shareholder Perry Capital recently dumped around half its stake.
But I’ll say it again: Stay away from JCP stock.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.
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