penney’s (not) from heaven

First, some welcome good news during what has been a gloomy start to autumn: Publishers Weekly gave my forthcoming book Dead Companies Walking its first review–and it was very positive. Here’s an excerpt:

Hedge fund manager Fearon shares his take on why companies fail in this surprisingly entertaining mix of business guide and memoir. Fearon … isn’t shy about revealing some of his financial missteps … But, as he insists, his mistakes—and his observation of others’—have helped him recognize key warning signs of a company about to tank … The final takeaway of this spirited book is that “learning to love failure all over again” can help America recover the adventurous spirit that Fearon believes our economy needs.

The book’s two main messages are that failure is far more common in business and investing than most people want to admit and that even very smart people sometimes make very dumb decisions. As I readily and repeatedly admit in the book, I’m no exception. I’ve made plenty of boneheaded mistakes as an investor and a businessperson. And, apparently, I’m not done making them. This week I goofed big time.

Last Wednesday, I published an article on Seeking Alpha praising the retailer J.C. Penney (ticker: JCP) and discussing why I covered my previous short position and bought a six figure position in the company. Today, at the company’s analyst day, management lowered guidance for same store sales growth for the upcoming 3rd quarter. Its stock promptly cratered. By day’s end, it was down just under 11 percent. Oof. That’s embarrassing–and expensive. Making matters worse, as I wrote last week, another stock in my fund–Trinity Industries–fell sharply after Jim Cramer predicted doom for the company. Add it up and I’m ready for October to be over already.

Bad runs are inevitable in investing. I’ve been through them before. The important thing is how you react to them. So, what am I going to do now? First, I’m going to stop crying. Then I’m going to do some serious thinking, and self-examination.

I normally don’t touch stocks like JCP, big well-known names with all sorts of Wall Street coverage. I like to find smaller, lesser-known gems (like, for instance, LGI Homes) who are growing rapidly but haven’t yet been discovered by the wider markets. But I’ve been to visit Penney’s management twice in the last year and I was obviously impressed with their plans for turning the company around.

Many people in the press have been comparing Penney with another struggling retailer looking to rebound, Sears. But the two companies are in much different situations. Even with today’s announcement, it’s important to remember that Penney has enjoyed positive comps  in recent quarters and will almost certainly do so again this quarter. Management also reaffirmed its full year guidance for positive cash flow. Thanks to smart decisions like bringing back coupons, in-store brands, and big and tall apparel, its operating margins have been heading in the right direction, as well. That means, unlike with Sears, customers are coming back to J.C. Penney. But the critical question is: are enough customers coming back? Today’s announcement doesn’t bode well. Last year’s 3Q comps were negative 4.8 percent. That’s a pretty easy number to beat, and a low single-digit improvement–as management forecast today–is disheartening.

As I wrote in my article, Ron Johnson created the business equivalent of a tire fire at J.C. Penney, and it’s going to take awhile to put it out. But every quarter has to get significantly better to make that happen. The company’s management is still putting out upbeat predictions for its long-term prospects. But the way to get to a healthy long-term situation is by posting a series of stellar short-term results.

Given today’s announcement, the only thing I can say with any certainty is that I am now quite uncertain about my J.C. Penney position. I’m flying down to Dallas tomorrow morning and I’m meeting with the company’s management again on Friday. I’m looking forward to hearing what they’ve got to say. In the meantime, I’m going to visit several other companies in the area. I’m also going to comfort myself with some good barbecue and, perhaps, a couple of drinks. I’ll probably reread that positive review from Publishers Weekly once or twice, too.

One thought on “penney’s (not) from heaven

  1. Pingback: is it time to sample stocks in these two dog-eat-dog sectors? | the confessions of a contrarian investor

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