J.C. Penney's New CEO: Overvalued

| About: J.C. Penney (JCP)

It was announced yesterday that Apple's (NASDAQ:AAPL) head of retail, Ron Johnson, has left the company to become J.C. Penney's (NYSE:JCP) new CEO. JCP investors were overjoyed with this news to the extent that the stock rose 17% and was up 20% at one point.

This is likely a case of overexuberance over an event that will take a long time for J.C. Penney to realize on the bottom line - if it ever becomes realized. The event in itself has nothing to do with J.C. Penney's sales or profits in the next couple years and might even hurt profits as Johnson adjusts to the new business environment. This kind of overreaction happens often with stocks: a positive event for the long run but the euphoria wears off after a couple weeks and the gains get erased. As the company returns to business as usual, investors will have forgotten about the new CEO and the stock will lose some of its gains.

Yesterday was a good day for the market, so let's say JCP would've gone up 2% on no news. That means the stock rose 15% and added $1.125 billion to its market cap just from the hiring of Johnson. You could say he's the billion dollar man, a huge valuation. A rise of 7% seems about right, but 15%? He hasn't proved himself yet.

JCP Investors Have a Lot of Faith in Johnson

There are questions to be asked regarding what Johnson will bring to the table for JCP. As explained here, prior to his 11 year tenure at Apple as head of retail, he spent 15 years at Target (NYSE:TGT) as the VP of merchandise. Apple is a tech company, Target is a discount retail store. J.C. Penney is more like Target, but it is trying to become a more classy name like Macy's (NYSE:M). Macy's did very well last quarter and took away some of J.C. Penney's market share. For Johnson to be successful, he'd have to spice up the stores like he did for Apple. But what does he know about fashion in clothing? Does he know how to market J.C. Penney as a place with trendy clothes at great prices? Only time will tell.

Ron Johnson has never been a CEO, he always had a specific, one sided roll of being in charge of the stores. As a CEO, there will be a whole slew of other responsibilities he'll have to take on besides just making sure the stores are doing well. CEOs take on another level of complexity and pressure that Johnson has never experienced. J.C. Penney has a lot of faith in giving him this role, but he can't take any position other than the captain of the ship. Otherwise going from Apple to J.C. Penney would be a big step backwards in his career.

Apple stock went up yesterday, if Johnson is so valuable, shouldn't AAPL shares go down at his departure? When Lou D'Ambrosio, the former head of a telecommunications company, another tech company, was hired in February to be Sears' (NASDAQ:SHLD) new CEO, the stock didn't go up.

On the other hand, J.C. Penney's biggest shareholders, Pershing Square Capital Management, run by William Ackerman, had a lot to do with putting the new CEO in place.

“Ron Johnson is the Steve Jobs of the retail industry,” Ackerman told DealBook in a telephone interview on Tuesday.

Will Johnson help turn around J.C. Penney's lagging sales? We will see. But either way, it will take a long time for his influence to bear fruit and in the meantime Wall Street will lose its infatuation with him. I predict the stock will drop 5% or more. Short at around $34.5 or more, cover at around $33.

Disclosure: I am short JCP.