It has been a disastrous year for retail companies. The shift to e-commerce was already accelerating toward the end of 2019, with brick and mortar stores struggling to grow sales despite a strong economy. Then the novel coronavirus hit, shuttering physical retail and forcing consumers onto the internet. That’s particularly bad news for J.C. Penney (OTCMKTS:JCPNQ) and other department stores. And yes, the ticker symbol has changed. JCP stock was kicked off the New York Stock Exchange.
The coronavirus was clearly the catalyst that forced J.C. Penney into bankruptcy. The company had been trending in the wrong direction for many years, and the virus simply hastened what was already likely to happen.
For what it’s worth, the current round of protests is likely to cause further problems for ailing retailers like J.C. Penney as well.
Virus or no virus, protests or no protests, there’s simply no investment thesis for JCP stock anymore. It’s profoundly unusual for a bankrupt stock to retain any value.
Don’t Trust the Discount in JCP Stock
With J.C. Penney’s stock now trading for a paltry 21 cents per share, some traders have started grabbing it as a potential rebound play. With department stores, you often get the best deals buying stuff out of the clearance bin. The same doesn’t necessarily apply to department store stocks, however.
As we’ve seen with the fall of Sears, Bon-Ton, and others in recent years, oftentimes a department store stock ends up entirely worthless when the company go bankrupt.
For example, on the way down, folks claimed that Sears had tremendous asset value and that activist investor Eddie Lampert had some brilliant plan to save the company. Yet shares ended up essentially worthless. Similarly, some traders hoped that former large department store chain Bon-Ton would find a savior. Instead the company liquidated to little fanfare in 2018, leaving shareholders with nothing.
A Hopeless Situation
In May, J.C. Penney filed a plan to reorganize in the company. This plan includes a Restructuring Support Agreement that outlines an effort to split J.C. Penney into two entities. There would be new J.C. Penney equity, which would go to the existing bond holders. And there would be a J.C. Penney REIT to hold the real estate. Notably, the current common stock would end up being worthless. It’s right there in the SEC filing linked above.
And that makes sense. Generally, the last gasp for a failing company is some sort of asset play. Outside investors might come in and try to grab brands, loyalty programs, real estate, and other such assets in return for cash, letting the ailing company meet its immediate bills.
This is the absolute worst market for J.C. Penney to be trying to make a deal. Malls are closed or doing reduced business due to the coronavirus. And that was even before the national protests and looting started. J.C. Penney simply won’t get attractive bids on its remaining assets given current market conditions. Thus, they are planning to start over with fresh funding and wipe out the existing stock owners.
JCP Stock Verdict
The vast majority of the time, when a company goes bankrupt, the old stock is wiped out. Sure, there are exceptions, but they are so rare as to prove the rule. Simply put, a company’s equity is the riskiest portion of a company’s capital structure. They get the maximum upside if everything goes well, but face total loss if things go sideways. That’s precisely what has happened with J.C. Penney.
From the looks of the bond market, even the creditors are going to take a hit in this bankruptcy. When there aren’t enough assets to pay off debt holders, the common stock holders almost always end up with a big fat zero. It may seem alluring to buy the stock at 20 cents and hope for some sort of miracle, but you’d have equally good odds buying a lottery ticket.
There are plenty of distressed retail companies out there that are still solvent and could potentially turn things around if the economy recovers quickly. A company like Macy’s (NYSE:M) gives you exposure to a potential recovery in malls and department stores and still has a significant amount of balance sheet flexibility. Macy’s shares are down 88% over the past five years, so it’s also a fire sale, but unlike JCP, it’s not yet heading to bankruptcy court.
Those sorts of distressed but not bust situations are likely to be a much better use of your speculative funds than trying to buy what’s left of J.C. Penney at this point.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
