Soros Fund Management, which is managed by billionaire George Soros, now owns 21.98 million shares of ailing retailer J.C. Penney (NYSE:JCP). The stake is 10% larger than it had been in the second quarter. The fund will be the retailer's largest investor when Pershing Square Capital pulls out of J.C. Penney.
Glenview Capital, a hedge fund managed by former Omega Advisors trader Larry Robins, owned 8.4 million shares at the end of the second quarter. Also, Tiger Consumer Management raised its stake in J.C. Penney to 5.43 million shares. While I don't recommend blindly following hedge fund picks, I believe they should serve as initial ideas for further research.
Taking a closer look at J.C. Penney
The shares of the company have fallen 50% in the past year on a number of factors. First, its former CEO Ron Johnson wanted to inject new energy into the company. He got rid of coupons and eliminated most discounts in favor of everyday low prices. However, the plan wound up turning off J.C. Penney's loyal customers. Second, the company's revenues fell 11.9% year-on-year in the second quarter. Revenues at stores open at least a year also dropped by 11.9%, worse than the 8.3% analysts expected.
However, Soros and other bullish traders may have noticed that the sales drop in the latest quarter is smaller than the 16.6% decline in the first quarter. Revenues improved from month to month, and the fall in the company's online business slowed dramatically. The chain is also seeing an encouraging beginning to the back-to-school season, the second-largest selling period behind the winter holidays.
Delving into fundamentals, its price-to-sales ratio signals that J.C. Penney is severely undervalued in comparison to its competitors in the services industry. The company's price-to-sales ratio is a meek 0.23. Investors are valuing the price-to-sales ratio of Kohl's (NYSE:KSS) at 0.57 and Macy's (NYSE:M) at 0.60 higher than J.C. Penney.
In addition, forward P/E ratios, which are based on analyst estimates of future earnings, give a similar conclusion. Analysts have no forward earnings for the company, compared with 10.74 for Kohl's and 10.12 for Macy's.
As mentioned earlier, J.C. Penney suffered a revenue decline in the last quarter. In an effort to prevent sales from sliding further, the company focused on bringing back basic merchandise like loose-fitting khakis. It also resumed frequent promotions. Due to these initiatives, J.C. Penney's cash per share is competitive at 6.97. It is decidedly more attractive than Kohl's (2.69) and Macy's (3.77).
Investors are wise to look at the sentiment surrounding a company's future earnings per share. J.C. Penney is grossly undervalued by this metric too, as its estimated 2014 EPS is -2.63. Not surprisingly, its competitors have estimated earnings far higher when looking at Kohl's (4.68) and Macy's (4.38). In the long run, these companies ' estimated EPS should be valued similarly. At the very least, it does not make sense that J.C. Penney's EPS estimates are valued without taking its macroeconomic environment into consideration.
Specifically, cautious consumer spending has certainly not helped J.C. Penney's shares. However, NRF forecasts a 3.4% increase in retail sales for 2013. This should pave the way for a bullish trend that will be in J.C. Penney's favor. Hedge fund traders may be aware of this fact.
After considering these factors, it is not surprising that some analysts are expressing positive sentiments about J.C. Penney. Maxim Group upgraded the stock from Hold to Buy with a price target of $27.00. Northcoast Research upgraded the company from Sell to Neutral. Atlantic Equities also upgraded it from Neutral to Overweight. Sterne Agee initiated the company with a Buy rating.
This may be why many of the company's insiders have shown interest in the stock. The number of shares bought in the last three months is 11,936. The bullish insiders include officers and directors such as William Tysoe, Thomas Engibous, Leonard Roberts and Turner Gerald.
All in all, investors would be wise to keep an eye out for any further hedge fund and insider transactions concerning J.C. Penney, as they may give a picture on what the future may hold. Assuming investors ignore this metric, they should be aware that the company is returning popular brands to stores. Along with improvements in online businesses, investors could expect a profitable third quarter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.