J.C. Penney Company, Inc. (NYSE:JCP)’s strong second quarter results, released today, appear to have caught the market off-guard. Shares are up by 5.89% today, though they have given back some of their earlier gains, a day after shares dipped by 2.2% as investors appeared to be anticipating an earnings miss. Instead J.C. Penney delivered an adjusted earnings loss of $0.41, well ahead of estimates of a loss of $0.49. The loss was also a big improvement over the second quarter 2014 loss of $0.75.
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Another positive development for J.C. Penney found in the earnings release is the company’s same-store sales, which were up by 4.1% during the quarter, solid growth for a retail company, even if starting from an arguably weak base. Revenue came in at $2.88 billion, slightly ahead of estimates, and besting the $2.80 billion in earnings from the same quarter of last year. J.C. Penney also predicted that its SG&A expenses would be trimmed by $120 million in 2015, even better than the $100 million the company had previously forecast. The latest surge builds on a strong performance for the stock year-to date, with it up by 29.94%.
The improving results appear to be consistent with the growing bullishness amongst the smart money managers tracked by Insider Monkey, who were investing far more heavily in the stock during the first quarter of the year. 29 hedge funds in our database had positions in J.C. Penney Company, Inc. (NYSE:JCP), up from 26 at the end of December. More tellingly, the total value of their collective holdings jumped by 50.11% to $175.24 million, a far greater jump than the appreciation of the stock itself, which was up by nearly 30% during the first quarter.
A reader might question our decision to focus on the small-cap stocks like J.C. Penney Company, Inc. (NYSE:JCP), considering that its mostly the larger counterparts of these companies that head the portfolios of most hedge funds. The reason for our focus is simple. Our research has shown that in the period between 1999 and 2012 the top small-cap picks of hedge funds outperformed the broader market by nearly one percentage point per month, whereas the top overall picks (mostly large-caps) underperformed by seven basis points per month during the same period. Why pay high fees to own a glut of low-performing stocks when you can invest on your own in hedge funds’ best stock picks? Since its launch in August 2012, Insider Monkey’s small-cap strategy has outperformed the S&P 500 every year, returning over 142% since then, nearly 2.5 times greater than the S&P 500′s returns (read the details here).
Despite the strong performance year-to-date, J.C. Penney Company, Inc. (NYSE:JCP) has had difficulty mounting any kind of a comeback since Bill Ackman, once its largest shareholder, famously gave up his board seat and dumped his massive stake in the fall of 2013 after the stock’s under-performance and management’s unwillingness to implement some of his vision. Ackman bought the stake at more than $20 per share and ended up losing hundreds of millions of dollars on the investment, chalking it up as one of his worst ever. J.C. Penney shares still trade at just $8.52 today, down by about 37% since Ackman left the stock.
Other smart money managers have been able to get in at lower price points however and hope to profit from their investments. Jim Simons’ Renaissance Technologies just made a big investment in the second quarter, adding 7.87 million shares to its holding, lifting it to over 11.03 million shares. Alexander Mitchell’s Scopus Asset Management opened a large new position during the quarter, of 5.73 million shares. Those are two massive investments, considering Simons’ previous holding of just 3.16 million shares was previously the top one in our database. Thus it looks like funds will end up being quite bullish on J.C. Penney in the second quarter, and so far so good: the stock is now up by more than 3.3% in the third quarter and the company appears to be heading in the right direction.
Thus, we believe the time may be right to take up a long position in J.C. Penney Company, Inc. (NYSE:JCP), as its long-awaited comeback finally begins to take flight.
Disclosure: None
