A REIT, or real estate investment trust, is an entity that trades on a stock exchange and directly invests in real estate. REITs rent out properties to other businesses, receive special tax considerations and typically offer investors high dividend yields. With 1,107 stores across all 50 states and Puerto Rico, J.C. Penney is a perfect candidate to transform into a REIT. In 2012, REITs returned a total of 20% to investors, compared to the S&P total return of 16%. Clearly, there is money to be made in this emerging industry.
DDR Corp (NYSE:DDR), a good comparison to a hypothetical J.C. Penney REIT, owns and operates retail shopping centers in 41 states, Puerto Rico and Brazil. Successfully leasing out 93.4% of its portfolio in 2011, DDR leases to companies such as Wal-Mart, Kohl’s, T.J. Maxx, Michael’s and Bed Bath & Beyond. Operating 538 properties around the world, DDR brought in revenue of $800 million in 2012. Since its remodeling in Sept. 2011, DDR’s stock has appreciated by more than 60%, despite missing EPS estimates in 3 out of 6 quarters. If J.C. Penney was to convert its 1,107 stores into a REIT business structure, a steep share appreciation would likely also occur, causing the short sellers to have their shorted shares called in and causing a short squeeze.
A short squeeze is a situation where a stock price is forced upward by an excess demand and a shortage in supply. Those who hold short positions are forced to repurchase shares to minimize losses, further pushing the stock price upward. This causes a chain reaction, especially in companies with large short interests, as more and more short sellers are forced to repurchase their shares. The effects of short squeezes can be as colossal as in 2008 when Volkswagen shares increased by nearly 500% in two days, making the German auto manufacturer the most valuable company in the world (for a short time). When Porsche announced plans to acquire a larger stake in the German auto manufacturer, Volkswagen’s large number of short sellers were forced to cover (buy back the shares they shorted) their shorts, pushing the stock price further upward. The mind-boggling share appreciation, in this case, generated mighty profits for those who were long the company. To offer more insight, Volkswagen’s stock had only a 12.8% short interest at the time. With J.C. Penney’s short interest of more than triple that, this stock has the potential to be an even bigger short squeeze than Volkswagen.
Will J.C. Penney experience a short squeeze like Volkswagen did? We might not see the retailer overtake Apple and Exxon-Mobil as the largest company in the world, but it seems likely that if the company were to convert to a REIT and see a decent rise in share price like DDR did, the sheer number of shorts that would be covered would shoot the share price off the charts as investors tried to get out of their short positions as quickly as possible. The opportunity to profit from shorting J.C. Penney may be over, but if you buy in now you might just be a part of the biggest short squeeze of the century.
The article J.C. Penney – Short Squeeze in the Making? originally appeared on Fool.com and is written by Jake Pompeo.
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