BlackBerry, J.C. Penney, and the Lesson of Lost Relevance

It's incredible how much can change in just six years.

In November 2007, shares of J.C. Penney  (NYSE: JCP  ) and BlackBerry  (NASDAQ: BBRY  ) were both trading near all-time highs, just a month removed from the S&P 500's pre-recession peak, and BlackBerry would climb even higher over the next year. 

BBRY Total Return Price Chart

BBRY Total Return Price data by YCharts

Despite the sharp recovery both companies would post after the recession -- and Penney's stock price being a strong performer as recently as early 2012 -- long-term investors are left with very little to show today. Peter Lynch said it pretty well when it comes to companies like these two:

There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.

BBRY EPS Diluted (TTM) Chart

BBRY EPS Diluted (TTM) data by YCharts

This chart shows the numbers pretty well. Since early 2011, both companies have been losing market share, and both have been hemorrhaging money for most of the past year. But, this is just part of the story. After all, Amazon's (NASDAQ: AMZN  ) earnings chart isn't much different from BlackBerry's.

AMZN EPS Diluted (TTM) Chart

AMZN EPS Diluted (TTM) data by YCharts

But, this is where we must draw a distinction and apply context to the discussion.

The difference between losing money and investing money
Amazon's earnings-per-share has fallen off heavily over the past few years, as the company has invested heavily in growing its business. The growth is unquestionable, as the nearly 20% annual sales increases over the past half-decade show, which brings us to a great way to measure growth.

AMZN Cash from Operations (TTM) Chart

AMZN Cash from Operations (TTM) data by YCharts

While cash generated from operations is going south for both J.C. Penney and BlackBerry, Amazon is consistently generating more cash from its business operations every year, even with the quarterly seasonality of its retail business. 

What's the point?
Investors should never focus on just charts any more than they should focus on just the "story." The point is, Amazon is benefiting from (and largely driving) a major shift in the way consumers shop. J.C. Penney struggles to retain existing customers, or to attract new ones. These challenges are heavily reflected in the results of both companies. 

Once the innovator, BlackBerry failed to make the transition from a highly successful business product to a highly sought after consumer item, while Apple and Google's Android have come to dominate the smartphone space that BlackBerry, in many ways, helped create. There's a good chance that investors who initially saw the writing on the wall could have seen this coming -- at least to some extent -- two years ago, when both companies started losing market share and profits started tumbling.

Final thoughts
All companies go through growth phases, and it's important for them to be willing to sacrifice profitability in the short-term in order to grow, transition, or otherwise position the business for the future. While Amazon has been pouring resources back into the business for years, BlackBerry and J.C. Penney have been struggling in a directionless morass for so long that investors should be smart enough to stay away. 

Could there be a turnaround? Sure. But, as Lynch said, holding onto a stock -- or worse, buying more -- when the fundamentals are deteriorating is just shameful. 

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  • Report this Comment On November 19, 2013, at 2:41 PM, Tflanman wrote:

    "Holding onto a stock -- or worse, buying more -- when the fundamentals are deteriorating is just shameful."

    What a ridiculous blanket statement.

    I guess buying Best Buy a year ago was shameful (it has tripled since then)? So was buying Ford five years ago (up about eightfold)? And Apple in the mid/late 1990s (investing $10,000 then probably would be enough to retire on now)?

    In each case, fundamentals were deteriorating.

  • Report this Comment On November 19, 2013, at 3:14 PM, melegross wrote:

    Tflanman, so you're a better investor than Peter Lynch? Interesting that you would think so.

    Picking out a few companies, as you've done, and assuming that it accounts for the vast majority that never make it back is foolish. Yes, I bought Apple in the '90's, but sold it. Holding on to it would have been a bad idea at the time. No one could have known, or even suspected, in late 1999, when the market imploded, that Apple would come back. When I heavily invested in them mid 2004, the future could be seen.

    Ford was never in such bad shape, and I bought a bit of it too.

    But Best Buy is a surprise to everyone. If you were lucky enough to have bought some during their doldrums, then good for you. Long term, they're still in trouble, so perhaps you should dump them soon.

  • Report this Comment On November 19, 2013, at 3:42 PM, Tflanman wrote:

    My only point was that it's ridiculous to say it's "shameful" to invest in a company with deteriorating fundamentals. The rest of the stuff you said I said, but in fact I didn't really say.

    Corporate turnarounds happen sometimes. I don't know if JCP will or will not succeed, but if you never invest in a company with deteriorating fundamentals, you shut yourself out from ever taking a chance on these spec plays.

  • Report this Comment On November 19, 2013, at 4:34 PM, TMFVelvetHammer wrote:

    Tflanman,

    It's a lot easier to use hindsight and pick out a handful of companies whose stocks have rebounded.

    And applying this statement to Ford five years ago is irresponsible on your part. Five years ago, Ford was actually bouncing back quite strongly. GM investors on the other hand, were totally wiped out in bankruptcy.

    The fact is, taking speculative bets with little more to your thesis than hoping for a bounceback isn't a smart way to invest. It's speculation at it's most dangerous.

    For every Best Buy, there are a handful of Circuit City's that are no more.

    Turnaround plays aren't a product of investing in companies that are deteriorating. It's a product of following these companies, and looking for signs that the deterioration has stopped, and that the company has reversed direction.

    Sure, you may miss some of the downside, but you also don't lose everything on a stupid bet.

  • Report this Comment On November 19, 2013, at 7:12 PM, thethreestooges wrote:

    We are here to make money whether you happen to be an investor or trader. If you are an investor, let someone like Warren Buffet do the hard work and invest in his stock. If you are a trader, there is no such thing as "Lesson of Lost Relevance". When someone make comments like this to drive the price down "without relevance" then, buy. When someone make comments to drive the price up "without relevance" then, sell. JC Penny was downgraded to $1 by Imperial Capital "without relevance" and drove the price down. Smart traders went in and bought a truckload and make money. Lesson learned, not "Lesson of Lost Relevance".

  • Report this Comment On November 19, 2013, at 9:48 PM, Tflanman wrote:

    Elihpaudio,

    "It's a product of following these companies, and looking for signs that the deterioration has stopped, and that the company has reversed direction."

    Your approach sounds nice but it's way more complicated than that.

    First off everyone is looking for these signs, what makes you think you'll be better and/or faster at spotting them?

    Secondly by the time you see these signs it's usually priced into the stock. As they say, buy on the rumor sell on the news.

    Thirdly your approach is by no means foolproof. Positive signs may ultimately prove to be a false start, which means you'll be left holding the bag after having bought at the higher price that baked in the positive signs.

    Again buying when fundamentals are deteriorating is risky there's no doubt about that. But that's what can be rewarded the most.

  • Report this Comment On November 20, 2013, at 2:30 AM, TMFVelvetHammer wrote:

    >>Your approach sounds nice but it's way more complicated than that.<<

    Complicated strategies are usually bad, especially for investing.

    >>First off everyone is looking for these signs, what makes you think you'll be better and/or faster at spotting them?<<

    I don't want to be first or fastest. I'd prefer to just be right more often. Even at the cost of not being fastest to being wrong.

    >>Secondly by the time you see these signs it's usually priced into the stock. As they say, buy on the rumor sell on the news.<<

    Nonsense. The thing is, fundamentals are based on real data, not rumors. I'll trust Peter Lynch before I invest on rumors.

    >>Thirdly your approach is by no means foolproof. Positive signs may ultimately prove to be a false start, which means you'll be left holding the bag after having bought at the higher price that baked in the positive signs.<<

    And a more complex strategy based on rumors and speculation is foolproof? I'll take my chances.

    I'm not aiming for foolproof -- just being right more often than wrong.

  • Report this Comment On November 20, 2013, at 8:40 AM, Tflanman wrote:

    Whatever man.Waiting for proof of a turnaround is just a different, more cautious style of investing. Not right or wrong, just different.

    Meanwhile I'm gonna go hang my head in shame about the 35% gain I'm sitting on with JCP, in less than a month. It's just shameful!

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