After the market closed on Monday, CNBC reported that Vornado Realty Trust (NYSE:VNO) was planning to sell 10 million shares of J.C. Penney (NYSE:JCP) at an asking price between $16.40 and $16.60. The sale was reportedly completed at $16.40 per share. Vornado has been one of the largest J.C. Penney shareholders recently, with 18.6 million shares (roughly 8.5% of the company). Moreover, Vornado founder, chairman, and interim CEO Steven Roth sits on J.C. Penney's board. This means that he has an inside view on the progress of J.C. Penney's "transformation." If he has lost confidence in J.C. Penney's turnaround, it is a strong sign that investors should stay away.
A strange investment
Vornado's investment in J.C. Penney was bizarre from day one. When Vornado first invested in J.C. Penney, most market watchers assumed that it was going after the company's real estate. Bill Ackman's Pershing Square hedge fund had recently purchased 16.5% of J.C. Penney shares, and Vornado announced intentions to work with Ackman's fund. Ackman had earlier led an activist campaign to get Target to spin off its real estate assets as a REIT, which lent credence to the idea that the Pershing Square and Vornado investments were part of a strategy to unlock real estate value.
However, that never happened. Instead, the two groups helped mastermind the hiring of former Apple retail head Ron Johnson as the new CEO, with a mandate to "transform" J.C. Penney. Initially, the move provided a nice boost to the stock price, and shares flew to a multiyear high in early 2012 after Johnson and his lieutenants revealed their turnaround strategy. However, J.C. Penney has met one disaster after another as Johnson has tried to execute his plan.
Furthermore, while Vornado decided to exit most of its "non-core" investments last year, it held on to its stake in J.C. Penney. Now, it is taking a big loss by selling the shares, since Vornado's average purchase price was $25.76. Vornado's decision to cut its losses now implies that it does not see billions of dollars of real estate value waiting to be unlocked at J.C. Penney. This is important because some investors saw real estate value as a potential "safety net" for J.C. Penney now that core operations have gone downhill.
Time to go!
With Vornado cutting its stake by more than half, CEO Johnson seems to have a more tenuous grip than ever. Ackman and Roth were the "dynamic duo" that campaigned for new leadership and gave him free reign to transform the company. Johnson's leadership has been the one stable point at J.C. Penney over the past year, and if he is now on the hot seat, this could add to investors' woes.
As of this writing, J.C. Penney is already touching new 52-week lows near $15. While I am often a proponent of Buffett's famous dictum to be greedy when the market is fearful, in J.C. Penney's case, I believe investors should be fearful at all times. There is no turnaround in sight, and I therefore see no good reason to own shares of J.C. Penney.