Friday, August 30, 2013

JCP Gets Knocked Out and Hits the 2002 Lows Again, Monthly Volume Hits Record After Ackman Dumps 39 Million Shares (Are Soros and Perry Still Long?)

JCPenney needs an emergency turnaround plan to avert bankruptcy after its insides were ripped up by former CEO Ron Johnson, who was brought in by activist hedge fund manager Bill Ackman and JCP's board in 2012 to turn around the distressed company. After JCP reported a Q2 loss of $586 million, Bill Ackman decided to leave the board and dump his hedge fund's entire 39 million share stake in $JCP to Citigroup for $12.60 per share, which incurred him a $410.7 million loss. As a result of Ackman's sale, JCP's volume hit a record high in August. Does this signal capitulation? I think JCP must form a strong base between $12-$13 before attempting to call a bottom on this levered stub (in the short to immediate term at least). And strong reversals and upside breakouts would provide additional confirmation. The stock closed at $12.40 yesterday. I also looked at JCP's implied volatility at the end of the post.

Source: StockCharts.com

In May, JCP received a $2.25 billion term loan (1, 2) which was secured by its real estate holdings. According to Reuters, JCPenney's stores, distribution centers and headquarters were recently appraised at $4.06 billion-$5.9 billion by Cushman & Wakefield and Morgan Stanley. But it looks like most of JCP's real estate has been pledged as collateral for loans ("What Is J.C. Penney's Real Estate Worth - And Does It Even Matter To Shareholders?" via Seeking Alpha).

Other large hedge funds currently own JCP's stock and debt. As of June 30, Soros Fund Management owned 19.9 million shares (9% of the company) and 500,000 call options on the stock, up from 7.9% in April (1, 23). Whether Soros liquidated his positions or not is yet to be seen. 

And CNBC reported on August 20 that Kyle Bass's hedge fund Hayman Capital Management owned 5.5 million shares of JCP (was that true or false?). To clarify his long bet, Bloomberg's Stephanie Ruhle wrote that Bass's fund bought JCP's secured loans and sold JCP's credit default swaps (sold insurance on its debt, which is additional long exposure). Here's more info on Bass's bullish view on JCP from her article:

Bass is betting that J.C. Penney can stabilize sales and has enough cash and credit to carry it until the 2014 holiday season, said the person familiar with the matter. In the hedge-fund manager’s view, the company’s apparel business is rebounding and it is sitting on valuable real estate.

Related articles on JCP's bonds: "JC Penney's 100-year bonds swoon amid retailer's turmoil"; "Bank Of Amerca Downgrades JCP Unsecured Notes On Dimishing Liquidity". In addition, Richard Perry's hedge fund Perry Capital reported that it owned 16 million shares or 7.26% of JCP on August 9, and Perry sent a letter to the board. Like Ackman, he wants the "dream team" in place to turn around the company (via Market Folly):

We believe that immediately appointing Allen Questrom Chairman of the Board and Ken Hicks CEO is imperative at this juncture, and we anticipate that the company’s various constituents would be highly supportive of such a change. In the words of Citigroup retail analyst Deborah Weinswig in a publicly available research note:  “Questrom + Hicks = Dream Team” (Dear Board of Directors, Time is of the Essence! August 9, 2013).

Related article: "Running Man: Foot Locker Chief Leading Rare Retail Turnaround". Who knows if these funds have other hedges on or if they changed their exposure already. Will Carl Icahn scoop up shares next?

Finally, here's a quick look at JCP's implied volatility (the pricing of its options). Its IV spiked to 98% on August 12 and August 14, a one year high, right before the Ackman attack. And after the Ackman event occurred, JCP's IV pulled all the way back to 60%. Yesterday JCP's IV ended the day at 59.9% and its HV (historical volatility) was at 57.5%. Does this mean fear has abated in the stock? It's too early to tell for sure. That's why I think technicals are very important to watch here with this falling knife type action. If JCP ends up basing out here and its IV bases out and/or falls further, it could provide a good entry point to hedge the stock with puts or buy calls for a trade. But it all depends on the price and history of the specific contract. The underlying chart of JCP really needs to provide additional information. The stock is near uncharted territory (< $12) and the co. is one step away from a liquidity crisis. I'm specifically watching the Ackman Ratio right now (HLF/JCP). I put it on my real-time watchlist. Here is JCP's IV and HV up against the stock price via Optionmonster.com's quote section.

Source: OptionMonster.com

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