J.C. Penney and Herbalife: Follow the Money

George Soros recently made some important, and possibly telling, moves with J.C. Penney (NYSE: JCP  ) and Herbalife (NYSE: HLF  ) .

As you might already know, it was recently revealed that Soros sold shares in both companies. Fortunately, he also initiated stakes in two new companies. However, let's first take a quick glance at the importance of what Soros does with his money.

While past results don't guarantee future results, Soros Fund Management LLC has returned $40 billion to its investors over the past 40 years. Keep in mind that over that time-frame, numerous hedge funds have failed and there have been several bear markets. Over the past 15 years, Soros has also had to navigate through a boom-bust cycle that our economy now finds itself trapped in. Of course, all hedge fund managers have had to deal with the same challenges. However, Soros has been one of the most consistent performers, which is why many other hedge fund managers follow his moves. Last year alone, Soros Fund Management LLC, which is now operating as a family office, yielded profits of over $5 Billion dollars. Don't you wish you were there? Or, don't you at least wish you could have access to this information?

The good news is that you do have access to his most recent moves ... in a way. Anyone who manages over $100 million must report their stock purchases and sales to the Securities and Exchange Commission within 45 days after the end of the most recent quarter. Therefore, you get to see the moves that were made, but only well after the fact. Nevertheless, this is still imperative information. Even if you missed the biggest impact on the stock price, this information indicates what Soros Fund Management LLC thinks about the future prospects of the underlying company. That is valuable information. 

Let's take a look at Soros' most recent moves, and how you can either potentially save money or profit from these moves.

Soros in action
Back in April 2013, Soros bought 17.4 million shares of J.C. Penney. This had a lot to do with former CEO, Ron Johnson, being removed from the helm of the company. This was a logical move by Soros on its surface. When a CEO fails in a big way the likelihood of improvement is high, especially over the next year.

Johnson's attempt to create boutique-like stores and offer everyday low prices didn't resonate well with J.C. Penney customers, who were accustomed to promotions and the traditional J.C. Penney layout. This is because most J.C. Penney customers are older than who you will find at an Apple store -- Johnson came from Apple.

Johnson might have had the right idea. A retailer needs younger consumers for long-term success, but the execution wasn't there. Whatever the case may be, Myron Ullman was brought back in as CEO, and promotions, a traditional J.C. Penney layout, and popular private brands soon followed. However, the turnaround hasn't been a success thus far. While year-over-year comps look good, that's only because they're being compared to an atrocious J.C. Penney era.

The problem for J.C. Penney isn't just its older customer base, it also faces fierce competition and a hesitant consumer. Today's consumer is very value-conscious, and J.C. Penney must use steep promotions to attract those consumers to its stores. Therefore, the company's margins will contract, which will hurt the bottom line. J.C. Penney will likely continue to cut costs by laying off more employees and closing more stores, but you will have a difficult time finding a long-term growth catalyst for the company.

Whether Soros sees the same pattern or not is unknown, but in the last three months of 2013 he sold a third of his shares in J.C. Penney. When one of the best investors in history sells all of his shares of a struggling retailer, investors should take notice. 

As far as Herbalife is concerned, Soros trimmed his stake to 3.2 million shares from 5.0 million shares. Bill Ackman of Pershing Square Capital Management has a massive $1.6 billion short bet against Herbalife, claiming that the company's an illegal pyramid scheme. Herbalife's stock jumped 139% in 2013, crushing Ackman, but he's steadfast in his beliefs and he hasn't given up. He also got a boost from Massachusetts Senator Edward Markey, who sent letters to the SEC and Federal Trade Commission in January asking these organizations to delve into the business practices over at Herbalife. The stock has suffered since then.

Bullish Soros
If you're looking to initiate a position along with Soros (to a certain extent), then you might want to consider J.P. Morgan Chase & Co. (NYSE: JPM  ) or Citigroup. According to SEC filings, Soros recently bought 2.8 million shares of J.P. Morgan and 2.3 million shares of Citigroup.

The Foolish takeaway
Following George Soros won't guarantee success, but given his stellar track record it would be wise to strongly consider his moves if you're invested in, or considering an investment in, any of the aforementioned companies. In other words, exercise caution if you're long J.C. Penney or Herbalife, and consider digging deeper on J.P. Morgan and/or Citigroup if you're looking to initiate a new long position. 

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  • Report this Comment On February 20, 2014, at 10:24 AM, monowakcarr wrote:

    Please get your facts right regarding JCP and Soros

    The New York-based firm, which ranked as J.C. Penney's second biggest investor, sold 6.15 million shares during the last three months of 2013, according to a regulatory filing on Friday. At the end of the quarter, the firm owned 13.8 million shares, down 30 percent from what it held at the end of the third quarter.

    THERE IS A HUGE DIFFERENCE BETWEEN EXITING AND REDUCING A POSITION.

    http://ca.reuters.com/article/businessNews/idCABREA1E0132014...

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