In case you haven’t noticed, JCPenney (OTCMKTS:JCPNQ) is no longer listed on the New York Stock Exchange. JCP stock now trades over-the-counter. A little thing called bankruptcy will do that to a stock.
And yet, inexplicably, people are piling into JCPNQ. Here’s why that’s a bad idea.
This Kind of Dabbling is a Sign of Boredom
Unless you’re looking for a capital loss to offset capital gains, buying stock in a bankrupt company is almost always a losing proposition.
CNBC’s Jim Cramer, who’s been around stocks a hile, recently warned against some of the excessive risk-taking and speculation that investors are dabbling in during the novel coronavirus.
“I’ve never seen so many games played with stocks, which is that, ‘hey, we’re taking this one up today. We’re taking that one up today,’” Cramer said on June 9.
People on commission-free trading sites such as Robinhood are day trading as if JCPenney’s shares and Hertz’s (NYSE:HTZ) stocks have futures. They don’t. And Robinhood’s customers will feel the pain as a result of their insane speculation.
“I’ve seen a lot of unusual micro-bubbles over the years,” Bloomberg editor Joe Weisenthal tweeted on June 9. “But I don’t think I’d have ever guessed before that *bankruptcy* itself would be an exciting investment theme.”
I find it hard to believe that Carl Icahn, a billionaire 15 times over, would take a loss of nearly $1.6 billion by selling his Hertz shares for 72 cents each if he felt there was a chance he could get more than that for the stock he owned.
“I believe that based on a plan of reorganization that includes new capital, Hertz will again become a great company,” Icahn said in his press release announcing the sale of his stock. “I intend to closely follow the company’s reorganization and I look forward to assessing different opportunities to support Hertz in the future.”
The key words in that paragraph are “new capital.”
JCPenney’s Hopes and Dreams
Reports suggest that the department store chain wants to split itself into two companies as part of its plan to emerge from bankruptcy. One of the companies would be a publicly-traded real estate investment trust that would own its significant real estate holdings. As much as 35% of this REIT would be sold to a third party. The other company would own J.C. Penney’s retail operations.
Back in 2015, Sears spun out Seritage Growth Properties (NYSE:SRG), which acquired 250 of the department store’s properties. We all know how well that turned out for Sears’ shareholders.
JCPenney has another month to execute this plan so that it can obtain an additional $225 million in debtor-in-possession financing which would allow it to keep operating. If the plan isn’t carried out, it will have to put itself up for sale.
Either way, Covid-19 has put a major dent in the retailer’s sales. I find it hard to imagine that its sales will suddenly improve just because consumers can now come out of their homes.
More importantly, JCPenney filed for bankruptcy in May with $3.7 billion of debt. Meanwhile, one estimate puts the value of its real estate between $700 million and $1.4 billion, suggesting creditors are the only ones holding any cards in this situation.
The Owners of JCP Stock Will Likely Be Wiped Out
Consider amusement park owner Six Flags (NYSE:SIX).
It went bankrupt in June 2009. At the time, it had more than $2.7 billion of debt. In May 2010, Six Flags emerged from bankruptcy with just $1 billion of debt. Those who owned the company’s bonds before it went bankrupt ended up owning a big chunk of the company after it went public again in June 2010.
This is the key quote from a May 2010 story about Six Flags emerging from bankruptcy:
“The company’s pre-bankruptcy shares were wiped out under the reorganization, and Six Flags has applied to list newly issued shares on the New York Stock Exchange,” Reuters stated at the time.
Those who owned its stock before its bankruptcy were wiped out.
Once the bankruptcy judge sorts out who’s owed what, there typically isn’t any money left for the shareholders. As for the creditors, they often aren’t made 100% whole by bankruptcies; instead. their debt is converted into new equity.
The Bottom Line on JCPenney
Cramer has spoke out against the stupidity of investors buying bankrupt stocks, and I applaud him for doing so. I always like to say that investors have options. Buying bankrupt companies shouldn’t be one of them.
If you’re one of the people who’s speculating on JCPenney, you have no one to blame but yourself if you end up losing money.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.