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Value Investing and J.C. Penney

May 16, 2012 | About:
If you’re a dispassionate observer and investor, you have to laugh at the hyperventilation over J.C. Penney’s (JCP) quarterly results. It’s another case study for why there are so few value investors. Most investors, both professional and amateur, say they are long term-oriented and believe they have an advantage over the excessively short-term types on Wall Street. Then, a poor quarterly result comes in the very early stages of a turnaround, the turnaround which by all accounts is totally on track, and those same investors who had touted the company a few months earlier now run for the hills.

If you weren’t committed to the J.C. Penney turnaround in the first place, why did you buy it? If you’re reacting to the stock price drop only, and haven’t actually watched the investor presentation from yesterday (located here), then shame on you. Good for the rest of us, though. That’s why there are far fewer value investors than logic should dictate. Most investors can’t control their emotions. They were excited to buy in a few months ago, and now that headlines have turned against them, they’re ashamed to hold the stock.

What Wall Street is missing about the results is that the new pricing strategy is what is attracting new brands. The coupon and discounting method of the past was not sustainable and turned away quality brands that didn’t want to be associated with it. It also attracted crappy customers. The day of reckoning from this old strategy has now come, and the future is incredibly different.

If you watched the presentation, you would have seen some of the new brands being attracted to J.C. Penney. They’re coming on board for two reasons: They respect J.C. Penney’s new leadership, and the new pricing strategy won’t diminish their brand. J.C. Penney is looking for a new kind of customer. Of course, they’d like to keep many of their old customers, but the new ones are more sophisticated, will make more visits, and will make higher dollar purchases. The old customer was only interested in getting something cheap. The new customer will be excited to come in because of the brands and shops.

Anecdotes are always a bit dangerous, but I’ll share one to demonstrate what I mean. My wife had been in a J.C. Penney store once in the past five years, and that was because I dragged her there a few months ago to see if there had been any changes. I was listening to the presentation yesterday while sitting next to her and when she heard some of the new brands being brought on board, on at least four occasions she said, “Wow, how did J.C. Penney get them?” These are brands like Happy Chic from Jonathan Adler, Michael Graves, Nanette Lepore and Tourneau. I caught her looking on J.C. Penney’s website last night, and she’s excited about going into the stores. She’s the face of a new and lapsed customer that J.C. Penney wants.

If you truly are a long-term investor, you’ll be okay with some bumps along the road. There undoubtedly will be some. Many of these brands won’t be launched until the fall. Some of the attacks I’ve seen on Bill Ackman because of the results of one quarter are laughable. It says more about the attacker than about Ackman. If you were interested in J.C. Penney a few months ago, and now aren’t, you should examine whether you’re actually an investor as opposed to a speculator. You shouldn’t be selling at these prices. You should be making large purchases.

Disclosure: Long JCP

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About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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Rating: 3.8/5 (17 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 2 years ago


JCP's new strategy has been a total disaster an d shows no signs of getting better.

It is still no bargain even after the big drop.

They did not eliminate the dividend due to good news.
slkiel
Slkiel - 2 years ago
I could not disagree more with you. Watch the presentation. The brands are important, as I mentioned, but also look at the streamlined expenses and reduced corporate bureaucracy in systems and personnel. In fact, nearly every sign points to things improving.
L3G3ND
L3G3ND - 2 years ago
Ron Johnson may be able to turn around JC Penney -- but it is not going to be a quick or easy. The JCP brand has been synonymous with cheap "crap" without being associated with value the way Target and Walmart have been. I haven't bought anything there for over 15 years.

I have walked through JCP and seen some noticeable branding changes -- but if I were not an investor I would not even have looked. Even if he does a wonderful job of changing the brand -- how will he convince a different set of customers to consider them?

Ron Johnson maybe have done a fantastic job with Apple's retail strategy, but there he was selling iPods, Macbooks, iPhones and iPads. Only time will tell if he will be successful at JCP.

Why should we invest in JCP over the other wonderful value opportunities that do not require a challenging turnaround story?
The Science of Hitting
The Science of Hitting premium member - 2 years ago
So true; everybody's a long term investor until the stock price takes a hit - as is always the case, people judge an investment's merit by the movement of the stock price rather than by the business fundamentals.

Anybody who watches the video linked above will realize that this management team is making long term changes, as has been discussed from day one; I trimmed in the 40's after the valuation got a bit ahead of itself (from my view), but will start adding again in the low/mid 20's like I did after the sell-off in the months following the announcement of Ron Johnson as CEO (that was another interesting period - stock shoots up 20% on his hiring, and then fell by roughly 1/3 over the coming months).

As Ben Graham noted, make the market your servant; instead, most people continue to be a slave to his megalomania. I'm more than happy to buy this business at roughly 10x average earnings (over the past decade).

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