J.C. Penney (NYSE:JCP) made its quarterly numbers for the first time in years. I personally feared a negative comp, given how the bonds, stock and CDS had been trading. I was hugely relieved to see that JCP had comped positively and that it reiterated its liquidity guidance, implying both that they would still have the $2 billion of liquidity that they need to get through the next few years to the promised land of $1-2 billion is EBITDA and a $20+ stock price. The liquidity guidance also implies that margins were ok as it's hard to make your liquidity guidance if you don't hit your gross margin guidance. Some bears would argue that CapX could have been cut to make the numbers, but my sense is that most of the capital spending was locked in.
Maybe it shouldn't surprise me but yesterday into this good news or no-news as most companies should meet their guidance, the sell side (only 4 buys out of 36 firms and none by a bulge bracket firm) chose to cut target prices and downgrade the stock. These downgrades were stunning as the stock was at its all time low and the news was actually good (the initial reaction of the stock was to rally into the numbers). But if you understand the motivation of the sell side, it is not to help you make money. The sell side didn't tell you that the Ackman/Ron Johnson plan would wreck the Company. Instead, they told you to buy the stock. Sterne Agee didn't tell you that a massively dilutive offering was coming. Instead, they hosted a breakfast with the new CEO who reportedly claimed not to need to raise equity - which was raised the next day in a massively dilutive fashion. Sterne Agee must have felt burned by the offering as they waited until yesterday's news to cut their target from $9 to $3. The sell side is very herd-like in its mentality. Their job is to report the facts like uncritical journalists and or help large clients, usually hedge funds, by talking up their positions (most hedge funds are bearish on JCP). They tend to get you in at the top and out at the bottom. Since the Spitzer reforms, which limited analyst's ability to get paid for investment banking work, the quality of analyst on the sell side has declined dramatically.
One analyst cut his target on JCP just because the stock had fallen so far below his target. He still believed his target but was afraid of looking foolish with a target so far above the stock price. In some ways, even though I am a buy sider writing about my position, on SA I have become a form of sell sider. Except, unlike the other 33 bearish sell side analysts, I viewed yesterday's comps as good news. The Company needs to stabilize and while a 2% comp isn't going to get the stock to $30, it is the first step on the road to higher comps, margins and eventually a higher stock price. For any of you who followed BBY last year a similar pattern emerged. No one was bullish at $8 when I owned it. And everyone was bullish in the $40s right before it got crushed. The sell side is now downgrading BBY again after a 50% decline. When you invest in any market security, you should be aware of these dynamics. When JCP turns and the stock is safe again, there will be plenty of upgrades - in the $20s. I am sure I will be selling into those upgrades. History has a way of repeating itself.
Disclosure: I am long JCP. 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.
Additional disclosure: positions can and do change at anytime without warning or notice.