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I grew up in the investment banking business and have recently retired from it. My experience was mainly in opperations although I was exposed to all aspects of the industry. Being retired has allowed me to spend more time analyzing investments.
  • JCP Bears - Death By A Thousand Cuts 1 comment
    May 25, 2014 12:43 AM | about stocks: JCP

    Can JCP survive? When will they file for bankruptcy? Are JCP bonds a lottery ticket? How can they possibly get back all of those lost customers? Their debt is too large. Their margins are too low. Their merchandise is no longer wanted by shoppers. The chairman lies to shareholders. They're cooking the books with accounting tricks to make their guidance. They need to close hundreds of stores in order to survive. JCP is in such bad shape that one analyst cannot even put a value their stock. The shorts are smarter than the longs and they have shorted an enormous amount of shares. Well known investors have sold their stock. JCP cannot compete with the internet or the big discounters. ENOUGH!

    This is my first posting on S/A and most likely my last. I have no ambition to write nor do I have much to contribute to investment analysis. I do feel that the ad nauseum negative drum beat from some authors on this site must be addressed. I believe that most of it does not even qualify as analysis, instead I see a deep routed cheering for their desired outcome. I can't really offer the reader much, If you are looking for charts or numbers crunching here you are in the wrong place. There are plenty of smart bears out there that will dazzle you with their presentations and math skills. I am just a simple man with a simple mind. My life experience in the investment industry however has taught me a few things.

    1- Human nature does not change fear and greed affects all investors both personal and professionals alike.

    2- You cannot outperform the crowd if you invest with them.

    3- Investing in US stocks is a proven winner over time as their prices have risen for over two centuries.

    4- When companies have their back against the wall they seem to do whatever it takes to survive.

    5- Stocks have periods of under performance and over performance but somehow over time seem to always return to the mean.

    Full disclosure, I am long JCP and have been since September 2013. I intend to hold the shares for at least two more years and will very possibly increase my holdings in the future. Following are the reasons for my decision.

    1- JCP has been a proven retailer for over a century. They have endured and prospered through world wars, a flu pandemic, a myriad of recessions, a world wide banking crisis, out of control inflation, a great depression, Intense competition from internet sites and deep discount stores ETC.

    2- JCP changed their business model due to pressure from an active investor. It was short lived as it did not resonate with JCP's customers. As a result both the investor and his CEO are gone leaving the company deeply in debt.

    3- Mr. Ullman (age 66) agrees to return as CEO. He obviously had an intimate knowledge of the company and would know just how dire the debt situation was, but he came back. For money? With his resume and being on the Dallas federal reserve board he'd have plenty of other opportunities that would both enrich him and add to his legacy. Loyalty to his previous employer? Maybe so but why end his career with a failure. He was out of the picture. If he was part of the problem as some have suggested this was his out. After all Ron Johnson would be linked with the demise of JCP and Mr. Ullman would be in the clear to either retire or seek other interests free of any blame.

    4- Mr. Ullman invests $1,000,000.00 in JCP stock. If he was coming back for just a paycheck or loyalty why put a million at risk.

    5- JCP asks for new investors and gets them. They get both new equity and loans from the open market and Goldman Sachs underwrites the issues. Do you really think that Goldman would scam all of their customers and intentionally dump a loser on them in order to make an underwriting fee? Headlines "JCP out of business after Goldman Sachs recommends them". Not worth it!

    6- JCP attracts new talent IE Ed Record as chief financial officer. Lets see a financial officers job is to know all about finances isn't it? Why would a financial expert want a job with a failing retailer? Can you imagine the interview? "Mr Record we've gone over your resume and are very impressed. We'd like you to join our team. Your compensation will be 223,964 shares of JCP stock. Oh and by the way we are headed for insolvency". If you can answer that question please stop reading immediately.

    7- Supermodel Elle Macpherson "THE BODY" launches her new lingerie line with JCP. Do you know anyone with a nickname like that? WOW "THE BODY". Why would anyone in her position want to be associated with a loser? Money? Don't make me laugh. Exposure (pardon the pun) again stop reading.

    8- JCP beats guidance and grows sales for two consecutive quarters while other retailers struggle.

    9- JCP internet sales increasing at a rapid pace.

    10- Development of their Plano Texas real estate. Why would a desperate company develop real estate instead of selling it outright? If there was a pressing need for additional capital the sale of the property would be the prudent decision.

    11- Poison pill developed to stave off a company takeover. If my business was failing I'd encourage others to come to my rescue. I wouldn't limit the amount of shares that an investor could buy without my permission.

    12- Past losses preserved. Why preserve losses if there will be no future profits?

    13 - The stores look great and the employees are more than pleasant and helpful.

    14- An over funded pension plan. Companies in distress do not have overly funded pension plans. This indicates that JCP has the available finances, values their employees and is committed to doing right by them.

    15- Closing unprofitable stores. JCP is closing 33 unprofitable stores or .003%. of their stores. Not exactly desperation is it? Paring losers is a prudent act for any business. Money goes where it gets the best return so unprofitable stores must be closed.

    16- Sephora, a world wide leader in cosmetics not only has a presence in JCP stores but continues to increase them. A vote of confidence maybe?

    17- Van Heusen notes that their apparel is selling ahead of schedule at JCP stores.

    18- JCP bonds commanding higher prices.

    19- A new and larger credit line with better terms and rates.

    20- Mr. Ullman receives increased compensation from the board for his performance. Imagine the stains on all the board members records if the company fails. They enrich a CEO just before they go under. Not likely.

    21- Stephen Sadove joins the board. Another impressive businessman proud to have his name associated with JCP.

    22- Most rating agencies have a HOLD on JCP shares. That's a market perform recommendation and a big deviation from a SELL rating.

    23- JCP shares have more than doubled in price recently from their low of $4.90.

    24- The economy has been struggling for several years now and will pick up eventually. The longest period of economic underperformance in the U.S. was the great depression and that lasted about 10 years (1930 to 1940). I would estimate that we are closer to the end than the beginning of this underperformance. Returning to normal growth rates and eventually robust growth can only be a positive for JCP.

    25- S&P is projecting sales for Sears to be $35 billion for 2014. This is a $1 billion decline from last year and the 8th consecutive year of falling sales. In all Sears sales will be down 34% from their high posted 8 years ago. There are obviously severe and chronic problems at Sears. JCP should at least get some of that business as they sell similar merchandise.

    26- The U.S. population has been growing at the rate of 2.5 million people annually. This November will be three years since Ron Johnson was hired as JCP's CEO. The population will have increased by approximately 7,500,000. If JCP can capture just 2% of this increase they will add an additional 150,000 new customers. One comment on S/A indicated that JCP may have about 30 million customers or 10% of all Americans. If that turns out to be correct then JCP could gain 750,000 new customers. Either way a continual increase over time.

    27- JCP brings back employee incentives IE sales commissions. I would argue that incentives to produce are a positive not a negative force.

    28- The odds of losing money invested in U.S stock is miniscule over the long term. A very small percentage of businesses (not startups) actually fail. I've seen Woolworth struggle for years with a dying business only to re invent themselves into footlocker and thrive. Rite Aide drug stores struggled for a decade burdened with huge debt now profitable and being recommended. Goodyear Tire just about broke even over the last decade back in business and profitable.

    29- Short sellers do not make money. They've tried mutual funds aimed at short selling and they failed miserably. A short sale is actually a bullish transaction. The sale does not affect the price of the stock because you cannot sell on a down tick. However the shares must be bought back at some point as you cannot will a short position to your heirs. Buying the shares back in the open market does have a positive affect on the share price. The only thing bearish about the short sale is the belief of the seller. There is a cost to carry the position and you are responsible for any dividends or distributions. If there is no available stock to borrow you will be forced to cover your position at whatever the current price. All in all a loser strategy unless you are hedging with another security.

    30- Everything needed is already in it's place. The stores, leases, supply chain, vendors, personnel, banking relationships ETC. all exist and are not easily replaceable. There is a very strong interest by banks and landlords to keep the business afloat if possible. For the mall owners the loss of 1,100 anchor stores would be devastating and nearly impossible to fill. Also smaller stores in malls where anchor stores leave usually suffer sales losses. There is a big incentive for the mall owner to keep the anchor stores. For the bankers all you have to do is look at the recent housing debacle. Banks do not want to own assets they want to lend money as that is their business. Liquidating assets on a large scale is a nightmare and very costly to them. They also lose the customer for good. Having JCP remain a viable concern is preferable to closing their doors.

    31- JCP is extremely cheap. I would assert that the value of it's enterprise alone (stores, personnel, banking relationships, vendors, supply chain, credit card, leases, reputation, loyal customers ETC.) would cost many billions of dollars to replace far more than it's current market value.

    Conclusion - Each of my observations if taken alone can be dismissed out of hand. However when put together make a strong case for continuation. As to the future value of the business, who knows I'll leave that up to investors. However profitable companies have a habit of increasing their values over time. My personal opinion is that JCP will emerge better than they were and set new sales and profit records. The stock once sold for $80.00 and I believe it can again. My actual target is in excess of $100.00 per share ($5 per share earnings and 20 P/E) in the next decade, an 11 bagger from here or 3.66% better than the average market return. Upon looking back I believe that investors will marvel at what an incredible opportunity JCP was. So bring on the questions and dissenting opinions. I appreciate them and will answer them directly as I know how frustrating it is to get a spin answer or a dance around the issue.

    Disclosure: I am long JCP.

    Stocks: JCP
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  • Trampoline
    , contributor
    Comments (148) | Send Message
    I noticed you didnt include info about the CDS


    32. CDS are selling way off their highs as of the last earnings release / conference call.
    26 May 2014, 12:39 PM Reply Like
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