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 (OTC:JCPN.Q). 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)."
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.