Why Smart Money Still Owns J.C. Penney and Sears

J.C. Penney (NYSE: JCP  ) and Sears Holdings (NASDAQ: SHLD  ) have been on investors' minds for quite some time. The focus has always been on whether either company could be saved. Is Sears a dying retailer or can it be turned around? Is J.C. Penney on the verge of bankruptcy? Does it have enough cash to survive? These are the main questions on investors' minds and you'll likely find differing opinions.

But in looking at some big name hedge fund managers, you'll see that they're still invested in J.C. Penney and Sears. Many times it pays to follow the "smart money" and ride on their coattails. These managers are not just offering an opinion, but also doing so with their investment dollars.

Tough to argue with George Soros and his success
The second-largest shareholder in J.C. Penney is multi-billionaire George Soros. His investment career spans more than five decades and he is best known as "The Man Who Broke the Bank of England" when he made more than $1 billion in the course of a few days. According to Forbes, Soros is worth an estimated $20 billion. He'd have a lot more had he not given away $8 billion of his fortune to worthy causes.

I find it interesting that through all of the drama surrounding J.C. Penney, Soros kept his stake and added more. When he first disclosed his stake, he owned 17.4 million shares. Today, he owns almost 20 million shares. What's notable is what Soros has said in the past about his investment decisions.

I'm only rich because I know when I'm wrong ... I basically have survived by recognizing my mistakes. I very often used to get backaches due to the fact that I was wrong. Whenever you are wrong you have to fight or flight. When I make the decision, the backache goes away.

This tells me Soros thinks he's not wrong in owning shares of J.C. Penney. He's not alone. Hedge fund managers Richard Perry and Kyle Bass also own shares of the retailer.

Reasons to be optimistic
Things are looking up for J.C. Penney after the company posted third-quarter results. The retailer achieved positive comparable-store sales in the month of October with a rise of 0.9%. Online sales rose 24.5%.

For those concerned about liquidity, J.C. Penney repaid $200 million from its revolving credit facility. The retailer's total available liquidity at the end of the quarter was $1.7 billion. By year-end, the retailer expects its total available liquidity to rise to $2 billion. Bottom line, bankruptcy does not appear to be in store for this retailer.

Store-within-a-store showing promise
One of the biggest criticisms of former CEO Ron Johnson was his focus on the store-within-a-store concept. Well, it's starting to show positive signs. J.C. Penney's partnership that led to opening Sephora shops inside its own stores is performing well. In the third quarter, 30 new Sephora locations were opened. To date, there are 446 Sephora locations set up inside J.C. Penney stores.

In October, J.C. Penney and Disney launched their Disney Store partnership. This strategy could end up being a winning formula for J.C. Penney after all.

Billionaire Eddie Lampert won't quit
Sears chairman and CEO Eddie Lampert has ignored criticism of his tenure at the helm of the embattled retailer. He can afford to ignore that criticism since he and his hedge fund own about 55% of the company. He is the architect of the merger between Kmart and Sears and he's determined to make it work. Bruce Berkowitz and his Fairholme Capital support Lampert and own a 19.5% stake.

Undervalued real estate play
At the heart of Lampert and Berkowitz's thinking is all of the real estate Sears and Kmart have. They see value in these assets and that is what originally attracted them to Sears in the first place. This month Sears Canada announced that it will sell just eight properties for $300.3 million. This continues the company's pattern of selling assets. In October, Sears Canada sold the lease on its flagship store in Toronto.

Efforts to revive the retailer
Lampert still wants to turn around Sears. He knows that selling assets will only go so far. Kmart and Sears plan to open for Thanksgiving earlier than ever this year. Kmart will open at 6 a.m. and Sears at 8 p.m. on the holiday. Both will stay open late in an effort to drive sales.

To revive sales at Kmart and Sears, the company is launching a nationwide lease-to-own program. This initiative will allow customers to take home items such as appliances and furniture right away and pay for them in monthly installments. This differs from the layaway policy where goods were paid for before they could be taken home.

Foolish assessment
In looking at J.C. Penney, I can see what has attracted the likes of Soros, Bass, and Perry. While the company is still not yet profitable, the current market cap is only $2 billion and the company still has about 1,100 stores. For Lampert and Berkowitz, they're still looking to cash in on the real estate. In the end, both need to focus on getting customers through the doors and selling merchandise. For now, it looks like both retailers are going to survive and continue with their turnaround plans.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 24, 2013, at 12:43 PM, Dangremaus wrote:

    I agree with the foolish assessment, Mark. JCP has a chance based on their turn-around effort. Likewise, their stock is at a low and is beginning to turn around.

    Sears, however, is a highly bloated stock that didn't take much of a hit when the company reported a major loss. Lampert is purely using the sales of the real estate to pad the numbers, but something's got to give when they're liquidating flagship stores with no "real" turnaround plan.

    JCP has been trying a turnaround for years now and has something in play. Sears doesn't seem to have anything, and selling real estate without sales to pad income will only last so long. It seems predatory. The EPS alone should scare investors, as it's getting worse.

  • Report this Comment On November 24, 2013, at 2:17 PM, Otter63 wrote:

    BOTH companies built themselves with catalog sales. WHY...can't they go back to those basics once again? You can have catalog sales along with....on line sales. NOT everyone shops on line, and not everyone has computer / internet access.

    Get back to the basics, that made them retail kings.

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