Retail Stocks: The Bad, The Ugly, and the Worst – J.C. Penney Company, Inc. (JCP), Macy’s, Inc. (M)

Online shopping has grown increasingly competitive over the years.  Many retailers have started to follow the trend to capitalize on the online marketplace, but they still have much higher expenses than businesses that operate purely online. Investors, then, have very good reason to question which retailers are likely to last another ten years in the business. You probably remember visiting a Circuit City at some point in the distant past, but who would have ever thought they would go out of business?

In this article we will check out some popularly traded retailers and see what’s been going on with share prices, hedge fund holdings, and fundamentals in the recent past.  With this information, hopefully we can make a reasonable assessment as to which stocks are more deserving of your portfolio’s risk.

Up first, J.C. Penney (NYSE: JCP):

With annual revenue decline at a compounded rate of -3.5% and EBITDA erosion of almost -19% from 2008-2012, this would seem to be a questionable investment at first glance.  J.C. Penney’s stock used to trade over $85 per share in 2007 before dropping below $50 in 2008.  They currently trade around $21, or roughly 40% below 2008 highs, so it’s clear shareholders are concerned.  But for those of you who follow J.C. Penney in the news, you may know that Bill Ackman’s hedge fund, Pershing Square, keeps over 10.5% of its portfolio in J.C. Penney’s stock.  As of 3Q 2012, it was a top 5 holding for the fund.

Read our November, 2012 article: J.C. Penney: Bill Ackman Touts Support to learn why he is such a big fan of the company.  Ackman’s reasons for staying bullish on J.C. Penney are well founded, and with his near billion-dollar bet, this stock might be worth looking into further.  Here at Insider Monkey we’re fans of following in the hedgies’ footsteps (click here to check out our strategy).

Next, Sears (NASDAQ: SHLD):

Like J.C. Penney, Sears has experienced revenue decline over the same period.  Their revenue is shrinking at a rate of -4.8%, slightly higher, while EBITDA is declining at a compounded rate of nearly 48% per year.  That data might explain the roughly 55% decline in Sears’ stock price since 2008.  Their stock price was actually under $30 at the beginning of 2012, which is around 72% below 2008 highs.  For fiscal year 2012, Sears reported a net loss.  Though about half of this was from deferred taxes, the amount that isn’t from deferred taxes still overshadows all net income from 2008-2011.  Although I personally still have faith in Sears in the long run, I think there may be another opportunity to buy this stock under $30.

Hedge fund ESL Investments, managed by Edward Lampert (see Lampert’s favorite stock picks), was holding over 42% of his fund’s $5.5 billion dollars in Sears—a lofty bet from the new CEO.  Robert Jaffe’s hedge fund, Force Capital, is also a major Sears’s shareholder, keeping over 15% of his 13F portfolio in the stock, placing it as his No. 2 holding. With two enormous bets from two big players, Sears should not be overlooked as a potential value play.

Who’s left?