Saturday, September 3, 2011

More retail? Great...

Many people, myself included, have a tendency to make investing a lot more complicated than it needs to be.  IMHO successfully picking stocks can be broken down to two simple guidelines, 1) don't overpay and 2) make sure you're aligned with a capable and intelligent management.

These opportunities are rarely black and white, so you're usually left navigating the grey (for instance, how many times have you said "this stock is really cheap, but there are a few things I'd change about management?").  However, every once in awhile there's a fat pitch right down the middle, the only trick is you have to be ready to swing.

With that in mind, on Friday I bought 625 shares of J.C. Penney (JCP) at a price of $25.47, for a total outlay of $15,924.  On a numbers basis alone, the price of JCP is somewhere between "cheap" and "reasonable."  However, the real draw for me is both management's talent and alignment with shareholders.

First there's Bill Ackman, the activist/value investor who runs Pershing Square Capital Management.  A little under a year ago he began acquiring shares, and now owns about 18% of the company. During this time he was also elected to the Board, and recently signed a new agreement that would allow him to increase his stake to 26% without triggering a poison pill.  This new agreement is significant - you have a great investor with insider knowledge wanting to buy more stock - it's not much of a leap to conclude the stock is cheap.  Then there's the alignment thing - Ackman's goal first and foremost is to earn a return for his limited partners at Pershing, so my guess is he's pretty focused on maximizing shareholder value at JCP.

Next there's Steven Roth, the chairman of Vornado Realty Trust (VNO).  Through VNO Mr. Roth acquired shares and was elected to the JCP Board in tandem with Mr. Ackman.  Vornado itself has an interesting history; it was a struggling retailer until Mr. Roth took control about 30 years ago.  He closed down the retail operations and transformed it into a REIT, and since then the returns for shareholders has been spectacular (  Like Vornado JCP owns a significant amount of real estate, so I wouldn't be surprised to see some sort of real estate play here (although I think that's just part of the story).

Last but not least is Ron Johnson, the newly elected CEO of JCP slated to start in November.  Mr. Johnson's claim to fame is the Apple retail store and the Genius Bar, but before Apple he was the VP of merchandising for Target.  Mr. Johnson made over $100MM through stock options at Apple and now he's invested $50MM of his own money in JCP (in the form of about seven million warrants with a strike price of $29.92 and an expiration date in 2017).

So what's not to like here?  In Ackman, Roth, and Johnson you have some of the most talented professionals in capital allocation, real estate, and operations/merchandising, respectively.  They've all invested significant amounts of their own money, and by buying JCP stock I've directly aligned myself with them.  Of course that's no guarantee of success, but I'd say the odds are tilted in my favor!

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