Should Ackman short JCPenney instead?January 11, 2013: 11:18 AM ET
Hedge fund manager Bill Ackman has been in the news a lot this week for his attack against nutritional supplement company Herbalife (HLF), which Ackman is shorting because he believes it is a pyramid scheme. But one of Ackman's other prominent investments is tanking ... and unfortunately for him, he's on the wrong side of that trade.
JC Penney (JCP) plunged more than 5% Friday morning after UBS downgraded the struggling retailer to a "sell." Ackman's Pershing Square is the largest investor in JC Penney and he has been a vocal supporter of CEO Ron Johnson, who left Apple (AAPL) to take the top spot at JCP in 2011.
Johnson has yet to prove that his turnaround plan for JCP, which hinges on an everyday low price concept (i.e. few promotional sales or discounts) and boutique store-within-a-store format, will work. Investors are growing restless and some traders on StockTwits are predicting that Ackman will get burned big time with his JCP stake.
Ouch. This hasn't exactly been a great couple of days for Ackman. In addition to the JCP bloodletting -- shares were already down 7% this week before Friday's sell-off -- Herbalife has rallied more than 5% since Monday. Herbalife has aggressively defended itself against Ackman's allegations, culminating with a lengthy presentation for analysts in New York Thursday.
Is Ackman getting it wrong with both Herbalife and JC Penney? That remains to be seen. But Ackman doesn't have the best track record with retail stocks.
One trader brought up Ackman's investment in Target (TGT), which he owned from 2007 through 2011. Ackman tried to get Target to make big changes while he was a shareholder but the company resisted them and Ackman finally sold his stake after the share price continued to fall.
Ackman has stressed patience with JC Penney. It appears that Johnson's turnaround plan will take years to pan out ... if it ever does. But another trader compared JC Penney to one of the few retailers that's arguably in worse shape right now.
Spoiler Alert: Retailers that run into "cash flow distress" end up dead 100% of the time$BBY $JCP
Ha! But to be fair, Best Buy (BBY) may not wind up dead. Shares rallied Friday because holiday sales weren't as bad as feared. And the company might finally get bailed out if founder Richard Schulze makes an offer to take Best Buy private. But Best Buy does remind me of another retailer Ackman once owned a stake in that got crushed due to competition from Amazon. com (AMZN) -- Borders. The book chain went bankrupt in 2011.
Finally, while Ackman may be licking his wounds, another hedge fund manager may be licking his chops. Dan Loeb of Third Point -- who's most famous for shaming former Yahoo (YHOO) CEO Scott Thompson into stepping down after Loeb discovered inaccuracies in his resume -- disclosed earlier this week that Third Point bought a long position in Herbalife. There are also rumors that Loeb also is shorting JC Penney.
Too funny. I personally think that Ackman and Loeb should be forced to share the stage at the next Ira Sohn hedge fund conference. Maybe Carl Icahn or David Einhorn can stand in as a referee in case things get ugly.
Finally, it's time for the Reader Comment of the Week. Riffing on the $1 trillion platinum coin and speculating about names for what the Sacramento Kings should be renamed if a group that includes Microsoft's (MSFT) Steve Ballmer buys them and moves the team to Seattle made for good, clean Twitter fun this week. But Herbalife was the gift that kept giving. I particularly liked this response to one of my snarky comments.
Brilliant. Remember this day, kids. You just witnessed the birth of the multi-level tweeting business model!