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Vornado Begins to Exit J.C. Penney and Lampert Scoops Up More Sears

March 05, 2013 | About:
U.S. indexes continue their march upwards and are now in arms reach of making all-time highs. Higher markets in Europe are certainly helping push U.S. markets higher as the media’s attention is not focused on the continents longer-term issues such as excessive debt. What we sometimes forget is that throughout all the pain, the U.S. economy continues to be one of the performing economy around the world. Let’s see what our government does as we start to deal with the effects of the sequester.

J.C. Penney (JCP) continues to make headlines as the Wall Street Journal is reporting Deutsche Bank is “shopping” around a 10 million share sell order owned by Vornado Realty Trust (VNO). This adds another twist in J.C. Penney’s turnaround as it was Vornado’s Steve Roth and Pershing Square’s Bill Ackman idea to hire current CEO Ron Johnson. The sale would cut Vornado’s stake in the struggling retailer by 40% and comes less than a week after the century old retailer reported disappointing earnings amidst declining sales. The journal states that Vornado built its position at an average price of $25.75 and had booked $300 million in losses as J.C. Penney’s (JCP) shares continued to decline. The other major holders include:

  • Bill Ackman’s Pershing Square which owns 39 million shares
  • Dodge & Cox which owns 20.225 million shares
  • Hotchkis & Wiley which owns 13.877 million shares
J.C. Penney’s shares are once again making new lows and one has to wonder how much confidence is left in the turnaround. I’m reminded of Warren Buffett’s quote on turnarounds:

“Turnarounds usually don’t turn.”

Speaking of another retailer trying to make a successful turnaround, shares of retailer Sears Holdings (SHLD) are up as Chairman Edward Lampert disclosed an SEC filing that he purchased an additional 1,239,065 shares at a purchase price of $44.36. After the filing, shares jumped more than 5% and are now trading above $46. In the past 52 weeks shares have traded as high as $85.90 and as low as $38.40. Who says markets are efficient?

Other notable Gurus who have either established a new position or added to an existing position include:

Bruce Berkowitz had the following to say regarding his stake in Sears in his Q2 2012 letter:

“Sears Holdings (SHLD) (11% of the Fund) is one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none. Generally Accepted Accounting Principles ("GAAP") mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the 1626 purchase price of $23.70. The company's reported book value of $43 understates real values.”

Finally, Mason Hawkins’ Southeastern Asset Management has sent Dell (DELL) another letter opposing the buyout price of $13.85. Southeastern owns 146 million shares or 8.4% of the PC maker. Among the issues brought up by Hawkins and his team includes the way management mishandled Dell’s cash hoard.

“First, the Board of Directors has long declined to distribute Dell’s growing excess cash to shareholders, labeling it “trapped” overseas due to the tax Dell would incur for repatriating that cash. We were surprised to see this long-standing position change after Silver Lake and the management team announced their intention to bring the cash onshore in order to finance the buyout. A more equitable approach would have returned the cash to all shareholders instead of using it to fund the proposed buyout at the expense of other shareholders. As stated in our February 8 letter, instead of agreeing to a proposed go-private transaction that grossly undervalues the Company, the Board of Directors could have paid all shareholders a special dividend of $12 per share (comprising proceeds from repatriating overseas cash, monetizing Dell Financial Services (DFS) at book value, and raising $9 billion in new debt) with the Company retaining over $1.00 per share of free cash flow."

It might be a good time for Apple to take note on how it should not handle its cash hoard. At the end of 2012, Dell had more than $14 billion in cash or close to $8. The stock currently trades at $14.05, a premium to the proposed $13.65 buyout price.

Disclaimer: None

About the author:

earningsyield
I'm in love with value investing and in particular Joel Greenblatt's "magic formula". I run a well diversified portfolio

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