Bill Ackman’s Activist Investment Secrets: JC Penney

JC Penney announced that Pershing Square’s William A. Ackman and Vornado Realty Trust’s Steven Roth are named to be on JC Penney’s board, and they’re expected to be elected on February 22^nd, 2011. What happened after Bill Ackman’s and Vornado’s October 8^th disclosure wasn’t very interesting. If you had bought the JC Penney stock on Monday October 11^th at $33.12, you would have lost more than 2%. The S&P 500 ETF (SPY) returned 11.8% since then. What is interesting is what happened to JC Penney stock before the announcement.

JC Penney was trading below $20 at the end of August. That’s when Pershing Square probably considered buying the stock. During the first 10 days of September, JC Penney’s trading volume was below 5 million shares. However, the trading volume jumped to 11.6 million shares on September 13^th. The stock gained 5% that day even though there wasn’t any news that would affect the company. For example, Macy’s trading volume didn’t change much on that day. The next day, there were positive comments from JC Penney’s CEO. Macy’s jumped 3% and its volume doubled. JCP gained more than 7% on September 14^th , and the stock price reached almost $24 per share. Its trading volume also quadrupled to 17 million shares from 4 million shares on September 10^th.

During the following two week period, JC Penney’s stock moved in line with the stock market, with an 8 million shares daily volume. On September 28^th , both William Ackman and Steven Roth reach the 5% ownership threshold. This implies they were trading together. JCP Penney was $25.77 on September 28^th. Activist investors have 10 days to report their transactions to the SEC. Considering Bill Ackman had more than 15% of JC Penney stock when he reported his activities on October 10^th, he had 10 days to acquire another 10% of JC Penney in the open market.  Vornado also acquired another 5% during these 10 days, so the trading was really tight.

During the following 7 trading days, JC Penney stock sees enormous trading volume. A total of 115 million shares changed hands and the stock price increased 22%. SPDR Retail ETF (XRT) increased by 0.5% during the same time frame, and Retail Holders Trust (RTH) increased less than that. Bill Ackman And Steven Roth wanted to finish buying before they revealed their cards. As a result, there was a huge imbalance between supply and demand. This is a perfect example of how technical analysis (or trend following) would signal a strong buy and be successful. The time to profit from Ackman’s purchase was before he revealed his position. It was too late to profit after the revelation.