According to Bloomberg, as of Mar. 21, J.C. Penney Company, Inc. (NYSE:JCP) has a 42.6% short interest. This means that of J.C. Penney’s entire float of 219.2 million shares, there are more than 93 million that have been shorted. What this immediately tells us is that investor sentiment for J.C. Penney is very low. Nearly half of all J.C. Penney Company, Inc. (NYSE:JCP) investors are betting for the stock price to fall even more, and with good reason too! Over the past year, shares of J.C. Penney Company, Inc. (NYSE:JCP) have fallen more than 43%, and even within 2013, share prices have dropped 20%. These drops are due to net income falling into the negative. Their annual report, released Jan. 28, 2012, illustrated a loss of $152 million. Things got even worse in their annual report released Feb. 2, 2013, however, as we saw net income falling even more, amounting to a grand total of a $985 million loss. To put this into perspective, the 2012 loss alone is equivalent to 81% of the net incomes of 2008, 2009 and 2010 combined. But, why this monumental loss, and what does it have to do with a short squeeze? We’ll look into both of these.
On Feb. 1, 2012, J.C. Penney Company, Inc. (NYSE:JCP) rolled out a new plan to stop advertising hundreds of sales each year and instead offer low prices every day, while attempting to rebrand itself simply ‘jcp.’ This new plan received poor reception from shoppers, who have traditionally waited for J.C. Penney’s famous sales before shopping at the retail giant. Huge sales losses due to a decrease in the number of shoppers prompted management to announce plans to stop paying dividends on May 15, 2012, causing nearly a 20% crash in the share price in just one day. Additionally, the rebranding of the store’s household name caused confusion to investors and shoppers, who were used to J.C. Penney Company, Inc. (NYSE:JCP), further pushing down sales revenue and share prices throughout the year.
With that said, it shouldn’t come as a surprise that many investors wish to short the badly beaten stock. A smart investor who predicted the J.C. Penney Company, Inc. (NYSE:JCP) crash early could have made a fortune by shorting the stock before it fell 64% since Feb. 2012. But, when 43% of the shares become a part of the short interest, the opportunity for profiting off a short sell diminishes. As can be expected, when a company like J.C. Penney, with a balance sheet containing $11.4 billion in assets, is in trouble, countless suggestions are made as to how they can turn around the company. Since the crash in May 2012, these suggestions have included everything from reverting back to the original J.C. Penney brand, to becoming a REIT. For the purposes of this article, we will focus on the potential for J.C. Penney to become a REIT.