Tuesday, February 4, 2020

Smarter Than Ever? J.C. Penny

Is J.C. Penny "smarter than ever" or just irrelevant?

A reader writes, "Is J.C. Penny a good stock buy, or circling the drain? These folks at Fox Business seem to think it might be a good buy!.  I don't know. I bought a bunch of clothes from JC Penney last month and thought the store was good. Decent quality dress clothing at affordable prices."

My response was this:

Buy thousands of share of this. It is a sure thing winner! They will find a way to overcome all the lost sales from the disastrous efforts of their previous CEO, and will not suffer the same fate as Sears, Belk, or any of the legion of department stores that have gone belly-up or will do so in the next year or so.
Their debt-load is negligible, and the pension plan is fully-funded. Oh, and the demographics of their shoppers is favorable - mostly younger, wealthy millennials who favor "Mom Jeans" and other outdated styles which they now view as "retro".
Their prime mall locations are a sweet spot - low rents and high foot traffic! It is only a matter of time before Americans put down their cell phones and go back to the mall! This online shopping thing is clearly a fad, and from what I can understand, Walmart is teetering on the edge of bankruptcy - no one ever goes there anymore!
Yes, JC Penny is indeed "Smarter than ever" and a really good stock pick - and stock picking is the sure way to make money! 
Oh, and FOX BUSINESS NEWS is the best source of financial information!

Sorry for the sarcasm, but..... really?  The reason why this sort of thing angers me, is that a lot of  "small investors" (read: chumps like you and me) think we can outsmart the market and make a lot of dough.  And they let us do this just once in a while, just like casinos let us win once in a while - to keep us gambling.

A year or so back, I was perusing some "financial investment" site that was basically utter bullshit.  People were pretending to be "players" and making financial analysis of various companies based entirely on the stock price.   They had all these confusing charts showing stock price trends and very serious pronouncements using gibberish words and stating their "target price" for a stock - as if you could look at pricing trends and divine something from that.

At the time, Sears stock was in the tank - a buck or two a share, I guess - and definitely was circling the drain.  But these "prognosticators" would have none of that!   Trends in the price were sure indicators that the stock would go up!  Better buy now!   You might as well read tea leaves or divine intestines.

It was no better than a penny-stock pump-and-dump, and it may likely have been one.  The "expert prognosticator" took an option on the stock before making his pronouncement.   Think I am being paranoid?  Believing in conspiracy theories?  It is no secret - they do this right out in the open.  As I noted before, someone filed a complaint with the NHTSA claiming that the Tesla "auto-pilot" was defective and should be recalled.   A minor note in the overall scheme of things, until it was revealed that the fellow filing the complaint was a famous short-seller of the stock.

That's how you work the system today - stocks like Tesla are bought by dweebs who believe in Musk and not in P/E ratios or dividend yields.   It doesn't matter if Tesla does well or not - these are the types of investors who invest emotionally and will buy the stock when they read a news story favorable to Tesla, and then dump it when they get scared by another news story.  I am not picking on Musk - Tesla is just a convenient example.   Most of these "Pop Stocks" and Tech-that-are-not-tech companies are the same way - people want to think they are "players" and "invest" $1000 in a company they read about in the papers.   It never ends well.

So what happened to J.C. Penny's?   Changes in habits. Department stores and malls were all the rage at one time.  Shopping "downtown" was the rage before then.  Before then, we had the Mom-and-Pop stores on Main street.  I covered this all before.   The mall that I thought was a permanent part of the landscape when I was a teenager (and three years before, did not exist) was already declining by the time I moved from the area, and is gone now - replaced with a grocery store and "out-parcels."  The "anchor" of that mall was a Sears, by the way.

The big department stores downtown were undercut by mid-level department stores in the suburbs, which in turn were undercut by chain discount stores which in turn were undercut by Walmart.  Oh, sure, some of these stores still exist, just as some malls still exist and thrive.   But a lot of people have developed new habits.  I haven't been to a mall in years, a department store in ages.   It is just inconvenient, a hassle, the prices are "meh" and it seems to take forever to just buy a pair of pants.  I can go online and get them for less and never leave home.

Times change, habits change.  We stopped wearing suits - as a society.  This isn't some small thing.  back in the day - maybe 50-60 years ago, everyone wore a suit, even bums.   I mentioned before buying a "Popular Mechanix" book from the 1930's on home repair.  They advised that when you painted your house, you should wear your old suit as you might get paint on it.  The accompanying drawing showed a main with a full suit, tie, and fedora, applying white lead paint to the side of his house.   I guess it was a lot colder back then, or maybe people sweated a lot more.  Times have changed.

Today, we barely wear clothes.  We go outside wearing sweatpants and stretchy leggings.   What was considered underwear (t-shirts) is now considered outerwear.   Our generation won - what, I don't know, but we won.   Going to the Mall or a department store and buying a suit or a dress and having it "altered" is no longer a thing.   Getting "dressed up" these days means wearing your least-worn pair of blue jeans.

Will J.C. Penny make a comeback?   It is hard to say.   Aging customer demographics, high cost mall rents with low foot traffic, competition online and from Walmart - these are all hard things to deal with.   Servicing debt is an issue - $4B of it.   Like with GM, as you lose market share and close stores, it ends up that you have more retirees to pay than employees.  If you run out of money and can't put it back into modernizing the stores, people will stop showing up - as happened to Sears.

Sure, J.C. Penny could overcome all of these problems.   Other retailers don't have these problems.  Walmart and Amazon don't have any unfunded pension liabilities as the former doesn't generally pay pensions, and the latter hasn't been around long enough for anyone to have retired.  Other retailers are also making money which according to J.C. Penny's balance sheet, they haven't done in at least a couple of years.

Balance sheets.  P/E ratios.  Profits.  Dividends!  Bah!  All you need to look at is the stock price and what the "experts" say is their "target" price!  That's all that matters!   Yes, I am being sarcastic.

What is interesting is that large retailers can fade away slowly over time, as Sears did - a "zombie" company that was "too big to fail" and indeed is still going through its final death throes as its former CEO and now-owner pick the last bits of meat from that carcass.   Smaller retailers don't have that luxury, and when their debt cannot be serviced, they may go out of business and liquidate rather suddenly, as happened to a local chain of organic grocery stores recently.

And sure, I've made money buying companies that were "circling the drain" but pulled out of that nosedive.  I bough AVIS at 74 cents a share - but also bought GM and Fannie Mae at the same time.  My gains in AVIS were neatly offset by my losses in those other stocks, whose value went down to zero and stayed there.

Similarly, buying stocks based on your personal familiarity with the company or product can be short-sighted.  And yes, I've done this, too.  I bought stock in Fleetwood Enterprises, thinking that since the RV business was booming and they were the General Motors of RVs, what could go wrong?  Well, they were the General Motors of RVs and went bankrupt.   Turns out the iconic leader of the company had retired, and his children took over and made some boner business moves - trying to buy-out the legions of independent mobile home dealers (a business they were also in) and run them as corporate stores.  That failed badly and then the recession of 2008 was the coupe de grace - RV sales tanked.   Just because someone has a nice product doesn't mean the company is being run properly or indeed is even profitable.

Stock picking is for chumps, and I say that as an A-number-1 chump material.  I've done well over the years with a panoply of stocks - mostly dividend-paying stocks.  But quite frankly, most of my mutual funds have done as well, if not better.

If the economy retracts in the near future (which it may - but signals are still mixed), I may take some cash and buy back in - to some index fund or something.   It just takes too long to research individual stocks, and betting on one stock or another isn't investing - it is gambling.