J.C. Penney
(NYSE: JCP) has caught the eye of billionaire activist Carl Icahn who
reporedly bought up a substantial stake in the company. The Deal
Journal reported that the retailer may be among Icahn’s top five
holdings, meaning his stake could run into the hundreds of millions of
dollars. The move follows that of other activists, like William Ackman,
into retailers that have been beaten down by a slowdown in consumer
spending. Shareholders seem to be mixed on the news as shares started
the day higher only to drop more than five percent.
J.C. Penney shares are up over 25% off of their highs along with
many other retailers that have been helped by rate cuts and a tax
rebate that promises to at least temporarily boost spending. However,
many still see J.C. Penney as a cheap stock at these levels. The stock
has moved down 44% during the past year after same-store sales fell
7.5%, which dropped its price-to-earnings multiple to just 9.5x
last-twelve-months earnings. This compares to an industry average of
14.7x, making J.C. Penney one of the cheapest in the industry.
Activist and value investors alike have been flocking to the retail
sector recently amid cheap valuations. Icahn made his interest clear
last month when he said that recent declines in industry shares had
made them “very cheap”. Meanwhile, other activists like William Ackman
have accumulated significant economic and reported stakes in Target
Corporation (NYSE: TGT) and Sears Holding Corporation (NYSE: SHLD).
Indeed, the multiples of these retailers continue to trail the overall
market, while their real estate and credit card assets continue to draw
interest.
In the end, it will be interesting to see how this story plays out.
Retailers are definitely cheap, but many believe that it may be
justified given the substantial problems facing the industry. Activists
like Ackman have very specific reasoning behind their investments, but
Icahn may face problems if he is simply purchasing because they are
undervalued. The first lesson in high-return investing is to find a
catalyst - otherwise, stocks can stay cheap for awhile. What this
catalyst is remains to be seen, but this is definitely a stock worth
watching!
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