George Soros' Bets Against Ackman Showing Mixed Results, Net Gain
J.C. Penney (NYSE:JCP)
Soros chose late April as an entry point to J.C. Penney, when the stock had been languishing around its second-lowest price in several years for most of the year. It was also shortly after the exit of CEO Ron Johnson, whose turnaround plans had failed to reflect in the company’s financial results in his 17 months on the job.
Many analysts and investors initially read the buy as a vote of confidence. In the second quarter, Soros raised his stake from 7.91% to 19.98 million shares.
Subsequent events called into question whether Soros’ buy was pro-Ackman. It came to light that relations between Ackman and the board were strained at best when Ackman released a letter to the media on Aug. 8 in which he urged the board to replace the company’s CEO more quickly, and suggested former CEO Allen Questrom as the new chairman to lead the search. The board had a pointed response.
“The Board of Directors strongly disagrees with Mr. Ackman and is extremely disappointed that his letter was released to the media at the same time that it was sent to the Board,” said Chairman Thomas Engibous. “Mr. Ackman has been integrally involved in the Board`s activities since he joined two years ago. This includes leading a campaign to appoint the Company`s previous CEO, under whose leadership performance deteriorated precipitously. His latest actions are disruptive and counterproductive at an important stage in the Company`s recovery.”
Then more evidence surfaced that Soros was not in J.C. Penney because of confidence in Ackman. He and Glenview Capital Management both sided with the company in support of the current management team, Chairman Tom Engibous and Chief Executive Officer Mike Ullman, in the tussle, according to Bloomberg.
Another hedge fund, Perry Capital LLC, sided with Ackman and his efforts to replace Ullman and Engibous.
On Aug. 13, Bill Ackman left his position on the board of J.C. Penney. He issued the following statement:
“During my time on the J. C. Penney Board of Directors, I have always advocated for what I believe to be in the best interests of the Company – its stockholders, employees and others. At this time, I believe that the addition of two new directors and my stepping down from the Board is the most constructive way forward for J. C. Penney and all other parties involved.”
It was good news for Soros’ stock. J.C. Penney shares lifted as much as 9% that week.
But the shares’ brief perking up still placed the price nowhere near the $25 per share that Ackman began building his stake at. With a near $500 million loss and the price having declined by approximately half since he started buying, Ackman’s Pershing Square Capital Management sold all 39 million of its J.C. Penney shares on Aug. 27.
Shares responded little to the news, up less than a dollar since at $13.74 on Tuesday. This places George Soros’ average loss at 18%.
J.C. Penney currently trades with a price near a 10-year low and P/S ratio at 0.25, near a three-year low. Its per-share revenue has been in decline for the past five years, and its gross margin has also been in long-term decline, at an average rate of 3.3%. The Piotroski F-Score of J.C. Penny is 1, which is low and implies poor business operation.
See its five-year revenue and net income decline:
Soros’ Herbalife bet has already paid off in spades. Soros – who had in previous year invested in the company – bought an unprecedented 5,039,175 shares. It was his second largest new buy of the second quarter, accounting for 4.89% of the company’s shares outstanding.
He paid on average $43 per share for the holding and has seen a gain of 63% since, with shares at $69.23 Tuesday – a record high.
Ackman announced a short position in Herbalife along with a scathing 300-page report against the company in December 2012. Shares consequently plunged as low as about 39% that month.
Rather than agree with Ackman’s insistence that the $7 billion market cap multi-level marketing company is a fraud and pyramid scheme, however, many noted investors took the dip as an attractive entry point to a profitable company. Steven Cohen, Carl Icahn, Daniel Loeb and Joel Greenblatt all bought Herbalife shares in addition to Soros in the following months.
Ackman last month filed a complaint with the SEC accusing Soros Fund Management of being behind an attempt to short squeeze the stock, sharing his position in the company at an “ideas dinner.”
The company’s dramatic 123% gain this year has also been helped by positive business results. The company announced an 18% increase in revenue from the previous year to $1.2 billion in its second quarter results announced July 29. It marked the fifteenth consecutive quarter of revenue growth for the company. Earnings were $150.7 million, compared to a $132 million profit the previous year. Volume growth year over year was 14%, a company record. "
We reported our fifteenth quarter in a row of double digit top-line growth, reflecting the success that our products and distribution model are having in markets around the world helping to mitigate the adverse effects of the obesity epidemic. The second quarter record results for volume point and net sales were driven by the ongoing engagement of our distributors and consumer demand for our weight loss and nutrition products worldwide," Michael O. Johnson, Herbalife's chairman and CEO said in a statement.
Herbalife’s stock price jump Tuesday is likely due to an analyst report suggesting the possibility of a $2 billion share repurchase and giving the company a $92 price target, according to the LA Times.
Herbalife has also see an expanding operating margin and an acceptable debt level, although it has been issuing new debt over the past three years, in the amount of approximately $718.6 million. The company has a P/S ratio of 1.73, close to a one-year high. Its P/E is 15.7 and P/B is 16.8.
Herbalife’s revenue and earnings history:
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