by Charles Sizemore | December 5, 2013 3:27 pm
I joined Varney & Co. on Fox Business this morning to discuss the future of JCPenney (JCP) and JCP stock.
JCPenney is having a rough go at it today, with JCP stock down more than 9% as of the time of this writing. The impetus for today’s thrashing appears to be the news that Hayman Capital’s Kyle Bass liquidated his large position in JCP stock, admitting in a Bloomberg interview that the purchase was a mistake.
The aggressive buying by Bass — and of several other highly followed investors, including George Soros, Whitney Tilson and Jeremy Grantham — was one of the greatest bullish arguments for the company. JCPenney CEO Mike Ullman also recently put a million dollars of his own money into JCP stock, very visibly showing the world that management — along with the hedge fund masters of the universe — had faith in the turnaround.
Bass’ departure throws a nice big bucket of cold water on this argument.
JCPenney is showing some modest signs of life. Same-store sales rose modestly in October, and they rose by a whopping 10% in November. But we’re also comparing these results to 2012, which was one of the worst years in the company’s history. Same-store sales remain well below their 2011 levels.
There also is the pesky question of margins. Yes, sales are up. But JC Penney is offering some of the most aggressive sales pricing in its history. Gross margins were already in free fall in the first three quarters of 2013–before the Black Friday sales.
Amazon (AMZN) can get away with posting thin margins because it is a growing business and it is a market leader in e-c0mmerce. It also has the faith of its suppliers and of Wall Street behind it. JCPenney has neither of these things, and it has a growing pile of debt.
Between cash and short-term borrowing, Penney has about $2 billion in liquidity at the moment. But unless margins improve, the company will burn through that cash in less than a year. This means Penney will be at the mercy of its lenders to extend additional credit…or face the prospect of bankruptcy.
I made similar arguments in a recent CNBC appearance, commenting that Penney was on an “express train to oblivion.”
The other bullish argument for Penney is simply that it is cheap. And looking at the numbers, you can make a case there. Walmart (WMT), Target (TGT) and Kohl’s (KSS) all trade at price/sales ratios of around 0.5 to 0.6. JCP stock trades for less than half that, at around 0.25 times sales.
Of course, Walmart, Target and Kohl’s are all relatively healthy. JCP is only cheap if you believe the company will survive. And frankly, that is a highly speculative bet.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.
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