This Multimillon-Dollar Market Sage Sold J.C. Penney. Should You Sell, Too?

It's hard to argue with this man's reasoning.

Feb 18, 2014 at 5:10PM

Kyle Bass isn't a household name, but maybe it should be. Bass is the founder of Hayman Capital Management, and he's shown a knack for identifying macroeconomic trends that almost everyone has missed.

Prior to the subprime mortgage crisis, Bass predicted the fall of real estate and the ensuing credit crunch, and bought credit default swaps to help his investors benefit from the crisis. He also predicted -- and invested to profit from -- the sovereign debt fiasco in Europe.

So when Bass speaks, it's usually worth listening. Back in 2013, his company took out a rather large stake -- about 12% of his hedge fund's portfolio -- in J.C. Penney (NYSE:JCP). As he said in December: "[T]hey are based in our backyard, and with everything that happened we were just betting on stabilization (not turnaround)."  

Jcp

  

But when Hayman Capital reported its holdings last week, it was clear that Bass now believes there's little upside to owning the stock. His firm sold all 5.7 million shares of J.C. Penney it owned, likely for somewhere in the ballpark of $52 million, and probably at a rather significant loss.

It's no secret that J.C. Penney has fallen on very difficult times. None were more eye-opening than when the company announced that its same-store sales during 2012's holiday quarter had dropped an astonishing 31.7%. In other words, about one-third of J.C. Penney's usual shoppers during the all-important season abandoned the store.

Though many people pointed toward the company's 2% rise in same-store sales during 2013's holiday quarter as a sign of stabilization, fellow Fool Adam Levine-Weinberg crunched the numbers and discovered it wasn't as good as sign as it might seem: "J.C. Penney had reported in early December that comparable-store sales grew 10.1% in November. The latest update implies that comparable-store sales must have declined in both December and January." 

The real reason for the sell
Even Bass was excited when the November sales numbers came out, but there was one big thing he wasn't prepared for: a 40% share dilution. Indeed, in early 2013, the company had about 220 million shares outstanding. But by the end of last year, that number had jumped to about 305 million -- a 39% jump.

The primary reason for the dilution was liquidity. J.C. Penney is burning through cash thanks to store remodeling projects initiated by former-CEO Ron Johnson, and it isn't bringing in enough to offset those costs.

Adding together the struggling business and liquidity problems, it's not hard to see why Bass decided to dump his firm's shares. Of course, the company could still turn things around. But it might be wise, if you're a shareholder, to consider doing the same as Bass.

A much better way to invest
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. There's little doubt that J.C. Penney will NOT be that company.

Our analysts have found such companies before, with the likes of Amazon and Netflix. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns for YOU. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers