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J.C. Penney (JCP), the fourth largest US department store chain, is undergoing a transformation and brought in Ron Johnson, the ex-chief of stores at Apple (AAPL), to revive its business.
J.C. Penney scheduled an analysts' day on Jan. 26, 2012. The stock had been levitating for a couple of months in anticipation of Johnson making a great presentation. By almost any measure at $33, J.C. Penney was one of the most expensive major retail stocks.
On Jan. 25, Johnson made the rounds and leaked his plan ahead of the big event on Jan. 26. J.C. Penney will in the future be known as jcpenney. There is a new logo to evoke the image of the American flag. The stores will have a number of small boutiques as opposed to rows of racks. Most importantly, J.C. Penney will introduce a simplified promotion and pricing structure.
J.C. Penney also plans to cut a large number of jobs and save $900 million over the next two years.
‘Buy the rumor, sell the news’ is a dictum often followed on Wall Street. When the stock did not go up after Johnson made the rounds, short sellers aggressively sold the stock short on Jan. 25. Nine out of 10 times this technique is profitable.
On Jan. 26, every time the stock would fall as it should have, one or more buyers would aggressively buy it and run up the stock. This is a common technique used to cause a short squeeze. Watching this buying, short sellers started buying to cover generating upward pressure on the stock. The higher the stock went, the more short sellers had to cover --- the classic short squeeze.
When the company announced at the analyst meeting that it may meet or exceed earnings of $2.16 per share, it was like pouring gasoline on a fire. The consensus estimate was for earnings of $1.61. The news accelerated the short squeeze.
In two days, the technique of leaking the plan the day before and withholding the information on increased guidance until the Analysts Day caused a massive short squeeze adding about $1.5 billion to the stock value of J.C. Penney.
Is Ron Johnson so extraordinarily smart in understanding the mechanics of the stock market to add $1.5 billion to Penney's market capitalization in two days, or was it simply an accident? We’ll probably never know. After all, he is an ex-lieutenant of Steve Jobs of Apple.
It is likely that the people who engineered the short squeeze have already taken profits. As J.C. Penney starts the transformation, it will be interesting to see what its competitors such as Macy's (M), Kohl's (KSS), Target (TGT), Dillard's (DDS), and Sears (SHLD) do to counteract J.C. Penney's new plan.
By my estimates using the ZYX Change Method, the probability of success of this new plan is better than 70% in the long-term, but there are high risks in the short-term. There will be plenty of opportunities for investors to generate wealth as the transformation war starts.
About Me: I am an engineer and nuclear physicist by background, have founded two Inc. 500 companies, and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Reportwhich publishes four newsletters to help investors profit from change. Write me at Nigam@TheAroraReport.com.
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Full disclosure: I, my hedge fund, and subscribers to The Arora Report are long Apple from an average of $131 and took profits on 50% of the position at an average price of $360. Subscribers to ZYX Buy Change Alert may have a similar position and may have taken similar actions. We also have a position in JCP to take advantage of the short squeeze.
