Tag Archives | Kyle Bass

VIDEO: Will JC Penney Survive 2014?

I joined Varney & Co. on Fox Business this morning to discuss the future of JCPenney (JCP) and JCP stock.


JCPenney is having a rough go at it today, with JCP stock down more than 9% as of the time of this writing. The impetus for today’s thrashing appears to be the news that Hayman Capital’s Kyle Bassliquidated his large position in JCP stock, admitting in a Bloomberg interview that the purchase was a mistake.

The aggressive buying by Bass — and of several other highly followed investors, including George Soros, Whitney Tilson and Jeremy Grantham — was one of the greatest bullish arguments for the company. JCPenney CEO Mike Ullman also recently put a million dollars of his own money into JCP stock, very visibly showing the world that management — along with the hedge fund masters of the universe — had faith in the turnaround.

Bass’ departure throws a nice big bucket of cold water on this argument.

JCPenney is showing some modest signs of life. Same-store sales rose modestly in October, and they rose by a whopping 10% in November. But we’re also comparing these results to 2012, which was one of the worst years in the company’s history. Same-store sales remain well below their 2011 levels.

There also is the pesky question of margins. Yes, sales are up. But JC Penney is offering some of the most aggressive sales pricing in its history. Gross margins were already in free fall in the first three quarters of 2013–before the Black Friday sales.

Amazon (AMZN) can get away with posting thin margins because it is a growing business and it is a market leader in e-c0mmerce. It also has the faith of its suppliers and of Wall Street behind it. JCPenney has neither of these things, and it has a growing pile of debt.

Between cash and short-term borrowing, Penney has about $2 billion in liquidity at the moment. But unless margins improve, the company will burn through that cash in less than a year. This means Penney will be at the mercy of its lenders to extend additional credit…or face the prospect of bankruptcy.

I made similar arguments in a recent CNBC appearance, commenting that Penney was on an“express train to oblivion.”

The other bullish argument for Penney is simply that it is cheap. And looking at the numbers, you can make a case there. Walmart (WMT)Target (TGT) and Kohl’s (KSS) all trade at price/sales ratios of around 0.5 to 0.6. JCP stock trades for less than half that, at around 0.25 times sales.

Of course, Walmart, Target and Kohl’s are all relatively healthy. JCP is only cheap if you believe the company will survive. And frankly, that is a highly speculative bet.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Three Dividend Stocks Owned by the Smart Money

As I wrote back in August, it can be helpful at times to look over the shoulders of successful investors to see what their highest-conviction investments are.  And during times like these, when the economy is looking wobbly and the potential for a Eurozone meltdown is hanging over our heads like the sword of Damocles, that extra insight is all the more valuable.

Today, I’m going to take a look at one high-conviction dividend stock each from three investors whose skills I respect and whose track records have withstood the passing of a crisis or two.

The usual caveats apply; I’m basing this analysis on SEC filings that are reported on a time lag and may already be out of date by the time they become publicly available.  For these reasons, I will stick with large positions that the investor has held for a long period of time or new positions that I consider unlikely to have been sold so quickly.

Stock

Ticker

Guru

Dividend

International Business Machines

IBM

Warren Buffett

1.6%

Johnson & Johnson

JNJ

Prem Watsa

3.5%

Six Flags Entertainment Corp

SIX

Kyle Bass

4.1%

Let’s start  with the granddaddy of modern value investors, Berkshire Hathaway’s ($BRK-A) Warren Buffett.

Mr. Buffett made quite a splash last year when he bet big on technology powerhouse International Business Machines (NYSE:$IBM).  It was his first major purchase in the tech sphere, and it quickly became one of Berkshire’s largest holdings.    Buffett added to his position last quarter, and IBM now accounts for nearly 18% of Berkshire’s portfolio.

The appeal of IBM is straightforward; Buffett was attracted by the stability of the company’s cash flows and its business model as a high-end service provider whose customers are locked in to long-term contracts.

But its qualifications as a “dividend stock” might be a little more controversial.  At current prices, IBM yields only 1.6%.  Still, this is roughly in line with the current yield on the 10-Year Treasury Note, and—importantly—IBM’s dividend rises every year.  IBM’s dividend rose 13% this year and 15% the year before.

Of course, this is nothing new.  IBM is a proud member of the Dividend Achievers index, an exclusive fraternity of stocks that have boosted their dividends for a minimum of ten consecutive years.

So while the current yield of 1.6% is a little uninspiring, it’s safe to assume investors buying IBM today will be enjoying cash payouts far higher in a couple years’ time than they would have had they opted to invest in bonds.

Next on the list is the “Warren Buffett of Canada,” Fairfax Financial Holdings (FRFHR) Chairman Prem Watsa.

Like Buffett, whom Watsa admires, Watsa built his financial empire around a solid insurance business, which provided him with a growing float to invest.  And like Buffett, Watsa is known for being a patient investor who often holds his best positions for 5-10 years or even longer.

Watsa’s track record speaks for itself.  According to research site GuruForus, Watsa has grown Fairfax’s book value by an astonishing 212% over the past ten years.  This compares to total returns of just 34.9% for the S&P 500.  Impressively, he actually made money in 2008.  Fairfax saw its book value rise 21% in the midst of the worst financial crisis in 100 years.

Diversified health and pharmaceutical company Johnson & Johnson (NYSE: $JNJ) is Watsa’s largest holding by far, and accounts for more than 21% of his listed portfolio.

Johnson & Johnson is an obvious choice for a conservative dividend stock, and it is a current holding on the Sizemore Investment Letter’s Drip and Forget Portfolio.

It also happens to be one of the highest-yielding major American blue chips, with a 3.5% dividend at current prices.  And like IBM, Johnson & Johnson has a long history of raising that dividend.  J&J is a member of the Dividend Achievers Index.

Given the low repute of ratings agencies this matters less than it used to, but Johnson & Johnson is one of only four American companies to have its bonds rated AAA.  Yes, Johnson & Johnson is actually considered to be less risky than the U.S. government, and its stock pays more in yield.  This is one you can buy and lock in a proverbial drawer.

Our final guru today is hedge fund manager and fellow Dallas resident Kyle Bass, principal of Hayman Advisors.  Though he does trade equities, Bass is a macro investor better known for making large bets in the credit and currency markets; he made his investors a small fortune betting against subprime mortgage securities in the run-up to the 2008 meltdown.

Bass’s equity portfolio is completely dominated by Six Flags Entertainment Corp (NYSE:$SIX), the owner and operator of theme parks.  Six Flags makes up nearly 40% of his equity holdings.

With a current yield of 4.1%, Six Flags certainly qualifies as a dividend stock.  But readers should consider this stock a riskier bet than IBM or Johnson & Johnson.  Theme parks are sensitive to the state of the economy, and the stock trades at a nosebleed valuation of 32 times expected 2013 earnings.  There is a lot of optimism built into the price at current levels.

All of this said, Bass has certainly done well by owning Six Flags—it’s up more than 100% over the past year—and he clearly has a high level of conviction in the stock if he’s make it nearly 40% of his equity portfolio.

Disclosures: Sizemore Capital is long JNJ.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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