Use Caution When Investing With Ackman

Bill Ackman sure does like struggling retail operations. He's an activist investor, and he invests with the belief that he will be able to help the company by pressuring management into new strategies or pressuring the board into finding new management.

Ackman is at it again, as news came out on Friday -- and Thursday for insiders (just look at the late day chart of the stock) -- that his hedge fund, Pershing Square Capital Management, had acquired a 16.5% stake in J.C. Penney (NYSE: JCP  ) . A regulatory filing disclosed on Friday showed that Ackman beneficially owns 39 million common shares. A separate filing also showed Ackman held a 10.9% stake in Fortune Brands (NYSE: FO  ) .

It looks like Ackman is also going to be a pretty active investor in J.C. Penney. He announced in the filing that Pershing Square plans on actively engaging with management on matters related to the business, including its assets and current financial condition.

The Target fall-out
J.C. Penney isn't the only underperforming retailer in which Ackman has tried to unlock greater returns for its shareholders.  Earlier this year, he sold his stake in Sears Canada to Sears Holdings (Nasdaq: SHLD  ) , and he still has a large position in Borders Group (NYSE: BGP  ) . However, Ackman's biggest bet in recent years was with Target (NYSE: TGT  ) , which has been an ongoing battle.

Ackman dedicated his entire Pershing Square IV fund to his Target position. After making Target his largest holding, he lobbied a plan to management to spin off the company's vast real estate holdings into a real estate investment trust in order to unlock the true value of the assets. When management indicated that it wanted no part in this unlocking of value, Ackman launched a bitter and expensive proxy fight against the company in order to win representation on the company's board of directors. The battle cost the company more than $11 million to defend itself.

The experience was also costly for Ackman, both in monetary terms and in lost pride. The Target position has been a drag on an otherwise stellar investment career. Reuters analyst Felix Salmon calculated that at the end of 2007, the year Ackman initiated the position, the Target fund lost more than $850 million. As of June, Target was still Ackman's largest holding, representing 29% of Pershing Capital's portfolio. But with the recent additions to the portfolio, it seems likely that Ackman may wind down his Target position.

Want to join Ackman?
Ackman seems to have learned his lesson from the Target debacle. As he put it, "The investment business is about being confident enough to know that you're right and everyone else is wrong. Yet you have to be humble enough that you recognize when you've made a mistake. Earlier in my career, I think I had the confidence part pretty solid. But the humbleness part I had to learn.''

So one would expect Ackman to be more prudent in his actions and the way he works with company management. J.C. Penney has had a magnificent run up over the last month, rising more than 60% since the beginning of September. Yet with the retailer having faced falling market share due to competitors Macy's (NYSE: M  ) and Dillard's (NYSE: DDS  ) , it's clear shareholders are banking on Ackman to turn things around.

Investors are always smart to focus first and foremost on the fundamentals of a company. Here, though, understanding the risks of who's investing in your company is equally important.

Would you invest in J.C. Penney today? Let us know in the comment box below.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Andrew Bond owns no shares in the companies listed. Fortune Brands is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1328050, ~/Articles/ArticleHandler.aspx, 12/19/2014 3:17:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
DOW 17,778.15 421.28 2.43%
S&P 500 2,061.23 48.34 2.40%
NASD 4,748.40 104.08 2.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
BGPIQ.DL $0.00 Down +0.00 +0.00%
Borders Group CAPS Rating: *
DDS $119.03 Up +3.28 +2.83%
Dillard's, Inc. CAPS Rating: *
FO.DL2 $0.00 Down +0.00 +0.00%
Fortune Brands CAPS Rating: *****
JCP $6.80 Up +0.17 +2.56%
J.C. Penney Compan… CAPS Rating: *
M $64.07 Up +1.31 +2.09%
Macy's, Inc. CAPS Rating: ***
SHLD $33.29 Up +1.27 +3.97%
Sears Holdings CAPS Rating: *
TGT $74.64 Up +1.07 +1.45%
Target CAPS Rating: ***

Advertisement