MorningWord 9/27/13: Ackman Ain’t As Dumb As Some Hedge Fund Titans Think – $JCP

by Dan September 27, 2013 9:08 am • Commentary

MorningWord 9/27/13:   Its kind of ironic that as the Feds are in the midst of a massive hedge fund insider trading crackdown, one of the largest “insider” trades happened in plain site for all to see about a month ago. Remember longtime JCP shareholder and board member Bill Ackman’s liquidation of his entire stake of 39 million shares on Aug 26th at about $12.50??   I don’t mean to imply that Ackman had material non-public information, I merely mean to suggest that there were few shareholders that had more intimate knowledge of just how dire the situation was at JCP.  In case you missed it, JCP is offering 84 million shares at a price of $9.65, or 7.3% below last night’s close and almost 23% below Ackman’s price (which on paper as of now saved him a little more than $115 million).   Call it what you like, but the guy ain’t as dumb as some hedge fund titans think.

At the time of Ackman’s exit I remember thinking why would anyone buy on that Secondary when it was very apparent that the company would need to raise cash in the near future, thus offering more shares and diluting existing shareholders??   In an Aug 27th post the morning after “Ackman’s Hate Sale” I suggested:

given the deep dislike by some other large activist investors for Ackman, this JCP trade may just work if the company can raise capital and shore up their balance sheet a bit.  The point being, there are many like Carl Icahn that would love nothing more to see JCP double or triple in the years to come, not to prove Ackman right, but to rub his inability to stick with the investment in his face, just for the sport of it.  If the company does in fact raise equity in the weeks/months to come, this could be the print of all prints to buy on.

The situation is a mess, and there are plenty of shorts who are digging in (38% of the float is short) as evidenced by yesterday’s option flow, the 3rd most active line was the Jan 2015 $5 puts trading 14,000x, possibly protection but also could be shorts levering up.

My sense would be that the 3 largest shareholders now, Glenview, Soros & Perry, 3 of the smartest hedge funds in existence who have all amassed their positions in the last 6 months are likely to have a bit of staying power given their entry points likely with avg prices that will end up being in the low teens as opposed to Ackman’s in the mid $20s.

As for today’s trading, the stock could get sloppy, and a meaningful break below the offering price could possibly offer a good entry for those with high risk tolerance and a little bit of staying power.  The likelihood of a V bottom here is not great, but maybe the newsflow has been so bad that it could be good for those with no memory of the horror that was the last 2 years for JCP.