J.C. Penney Company, Inc. (JCP): Why Hedge Funds Believe

J.C. Penney Company, Inc. (NYSE:JCP) is a whipped dog.

The once proud name of American middle market retailing has had its stockholders played for suckers by a city slicker named Ron Johnson, who thought he could make the old dog cool again with some ribbons and a strategy born in Silicon Valley.

Unfortunately, J.C. Penney Company, Inc. (NYSE:JCP)’s was selling knives and clothes, not iPads. The strategy was imposed from the top-down, all at once, and never tested. The old customers left and the new ones never came in. Sales collapsed, and the company might be heading to Chapter 11 now had not Johnson been fired, replaced by the “failure” who came before him.

Despite this a whole lot of smart money, including Georges Soros and Goldman Sachs, have since flocked into the stock and its bonds. Before deciding whether to join them, it would be good for you to ask why that is.

It Could Be Sears

Under Eddie Lampert, Sears Holdings Corp (NASDAQ:SHLD) has not been setting the world on fire, but it is holding its own. If Ullman can do as well as Sears Holdings Corp (NASDAQ:SHLD) is doing, something he’s capable of doing, new buyers of J.C. Penney Company, Inc. (NYSE:JCP) shares will be doing quite well.

Sears Holdings Corp (NASDAQ:SHLD) has had declining sales for years, but it still did almost $40 billion in revenue during 2012. It lost a little over $1 billion during the year. For the quarter ending in February losses accelerated, to $626 million on sales of $12.26 billion.

Yet the company still maintains a market cap of about $31.94 billion. Share prices are actually up 23% during the year. Ned Davis Research recently raised its rating on the stock to neutral.

What’s going on? The company has assets worth $19 billion. It still has some brands performing well, like Kenmore appliances and Craftsman tools. Against $39.8 billion in sales, you have $31.94 billion in shareholder value. That’s about $5 in sales for every $4 in equity.

By contrast, J.C. Penney Company, Inc. (NYSE:JCP) had sales of $12.98 billion and equity of $3.79 billion. That’s more than $3 in sales for every $1 in equity. So if Penney’s were run as “well” as Sears (and few think Sears is run well) it could be worth more than twice what it’s presently worth.

There’s an old saying that when two men are running from the bear, you don’t have to be faster than the bear, just the other guy running. Is Mike Ullman faster than Eddie Lampert? Well, Ullman is at least a retailer, while Lampert is a real estate guy. Smart money says he’s at least as good.