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 KielSteven 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 email@example.com or through the firm's website at www.arquitos.com.