Shares of embattled retail giant J.C. Penney (NYSE:JCP) plunged to new lows on Monday after Imperial Capital cut its price target to $1 from $5 and warned that the company may soon look to file for bankruptcy.
From the note:
While we think JCP can be "turned around," we are becoming increasingly concerned that without a "deep-pocketed" long-term investor providing financial and "halo" support, the company may strategically file for bankruptcy protection to conserve cash while it continues to execute a turnaround in 2014 and 2015. We continue to believe in the viability and sustainability of JCP, which with support from a significant investor and/or stronger than expected financial performance.
Essentially, the fear is that the markets are losing confidence in J.C. Penney's financial position. Imperial notes the need for a special investor who would provide "halo" support. Of course, Warren Buffett, Chairman & CEO of Berkshire Hathaway (NYSE:BRK-B), is the first name that comes to mind. While there are reasons why Buffett might consider investing in J.C. Penney, I think a Buffett investment in J.C. Penney is highly unlikely.
Why Warren Buffett Might Be Interested In JCP
Easy To Understand Business
- Buffett likes to invest in companies that he understands. J.C. Penney is a traditional clothing retailer that has an easy to understand business model.
- Buffett is drawn to companies that have long histories of success. Berkshire's investments in Coca-Cola, Wells Fargo, and American Express come to mind. J.C. Penney has been around for 111 years, so the company has survived through some difficult times.
- Warren Buffett told CNBC that he is rooting for J.C. Penney. Buffett said that he worked in sales for JC Penney when he was young and really enjoyed it.
Small Investment Size
- For Berkshire, any investment in J.C. Penney would be relatively small. Berkshire need not buy the whole company to have a major impact. Furthermore, this small investment could have a meaningful impact if it is able to boost confidence in the struggling retailer. Let's not forget about the confidence-boosting investments Berkshire made in 2008 in Goldman Sachs & GE, and more recently in Bank of America.
Why Warren Buffett Is Unlikely To Invest In JCP
Fair Company At A Wonderful Price
- Buffett has often said "it is better to buy a wonderful company at a fair price than a fair company at a wonderful price." Certainly JC Penney is not a wonderful company at a fair price; J.C. Penney is a fair company at a wonderful price. Because of this it is difficult to see Buffett making a bet on J.C. Penney.
No Competitive Moat
- Buffett likes to invest in companies with wide competitive moats. J.C. Penney does not have a wide moat, as its competitors offer similar products are the same prices. If J.C. Penney had a strong competitive moat then it would not be facing the situation it is facing today.
- In a recent interview with CNBC, Buffett described J.C. Penney's situation, repeatedly, as "very very tough." To me, this comment indicates that Buffett is not interested in making an investment in J.C. Penney.
It would be foolish to say that there is no chance Buffett will make an investment in J.C. Penney. Anything is possible and, as I discussed, there are reasons why Buffett might be interested in J.C. Penney. However, personally, I think the odds are low that Berkshire makes an investment in J.C. Penney. It should be noted that Berskhire does not have much of a history investing in deeply troubled companies (2008 is an exception as the market was under assault). It should be noted that, even then, Buffett took stakes in the strongest banks, Wells Fargo and Goldman Sachs. Buffett is not a turnaround artist. Despite my belief that Warren Buffett will not provide "halo" support for J.C. Penney, I continue to believe the stock is interesting at these levels.
Sammy Pollack has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. 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.