The trend that's really killing Penney's...
In today's Digest Premium, we look closer at the trend that's going to undo iconic retailer J.C. Penney... and why no amount of smart management can save it.
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The trend that's really killing Penney's...
The Wall Street Journal now has a special section of its website devoted to the fiscal cliff.
The fiscal cliff is a hoax, of course, as far as investors are concerned. It's been in the news for months. Its effect on stock prices has likely come and gone.
Yet it deserves its own web page on the Wall Street Journal's site… It's almost like the Wall Street Journal is staffed by folks who have no clue of what's really important and what's not...
Where's the WSJ web page monitoring the Securities and Exchange Commission's effectiveness at stopping investor fraud? The agency is absolutely lousy at it. And that ongoing problem is much more important than the phony fiscal cliff scare.
Where's the WSJ web page devoted solely to tracking mergers and acquisitions for investors? That would help us keep an eye on which management teams are destroying shareholder value and which are creating it. That's information investors really need to know.
And where's the WSJ web page devoted to corporate governance? It could track all those boards of directors who sell their shareholders out by rubber stamping everything the CEO proposes... including his/her pay raises.
The Wall Street Journal will never start web pages devoted to these critical, ongoing issues that directly affect the value of the equities that trade millions (even billions) of shares a day on exchanges around the world... equities many WSJ readers have substantial retirement assets invested in.
You'd think the editors would see the broad chasm between financial news as it exists today and information that isn't totally worthless to investors (as most of what passes as financial news truly is). Investors read the WSJ like it's an authoritative source filled with critical information. But they're really just looking in the mirror…
The readers (and watchers of financial news programs, like those on CNBC) don't realize they're leading the publishers and programmers around by the nose. These publishers and broadcasters don't worry much about what people need to know. All they care about is what folks want to know. That's a much better formula for racking up big audience numbers that impress advertisers. The more folks tune in to hear about one topic or another… the more the media gives it to them. The echo chamber can make anything seem like the most critical issue in history…
The interaction between investors and the typical news outlet is like a hungry serpent who starts eating his own tail. Pretty soon, he's all full of himself, tied up in knots, and much worse off than when he started. I (Dan Ferris) bet most investors don't quite understand where the news ends and their own thinking begins.
Investors don't need to eat their own tails. They can step back and discount the reams of relatively worthless information in the news media. The best way to read the news is to follow the advice a friend and smart, successful investor once gave me.
Just be like Joe Friday, the lead character in the old TV police drama Dragnet. Friday didn't want anyone's opinion. When interviewing a female witness to a crime, he'd famously say, "Just the facts, ma'am."
Read popular news sources for verifiable facts. You'll soon realize as much as 90% of what you're reading is conjecture and speculation... and the reporter reading his employer's own headlines. And you'll get a much better idea of where the headlines end and your own thinking begins.
I've heard of some folks who simply don't read the news at all, but I don't see how that's possible. Don't read less news. Simply take less of it to heart by focusing solely on your own dogged hunt for verifiable facts.
Think of reading the news as a mining operation. A gold miner is really in hog heaven if he gets a gram of gold from a ton of earth. Investors need to focus on the grams of useful facts found in news stories.
I'm not saying insight and opinion found in popular financial news sources isn't valuable. I'm merely suggesting you put it into a separate mental bucket… and put the facts in your primary news-reading mental bucket.
That's my best advice to investors for today. Mine popular news sources for useful facts. That'll help you deal with the massive amounts of information you're exposed to every day.
The U.S. Energy Information Administration (EIA), a government energy research firm, stopped using West Texas Intermediate (WTI) crude, the longstanding U.S. benchmark for oil. Instead, EIA adopted North Sea Brent crude (the international benchmark) for the price forecasts in its Annual Energy Outlook 2013, which was released yesterday.
It's the first time the agency has used Brent, citing "a growing discrepancy" between the two.
We believe the massive amount of oil coming from U.S. shale plays will drive down the price of WTI... It's already down 11% this year to less than $87 a barrel. And we take the EIA's announcement as evidence our thesis is correct.
From 2000 to 2010, WTI cost on average $1.01 more per barrel than Brent. Today, WTI is nearly $21 less a barrel than Brent.
We last wrote about the divergence between WTI and Brent in the October 18 Digest. We were discussing the discovery of a new shale play, the SCOOP in Oklahoma…
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Production becomes more efficient over time. Improvements in technology and economies of scale drive production costs down. Every new shale formation benefits from the production enhancements of the previous ones... resulting in increasing supply and declining oil prices. |
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In 2013, Continental estimates the oil it produces will trade at a discount of $8-$11 per barrel to Brent crude. |
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Brent crude is oil produced from the North Sea, and its price represents a benchmark for oil in Europe. It is a low-density petroleum with a low sulfur content. (That's known as "light" and "sweet" in the oil industry.) Produced from conventional drilling operations, Brent crude has typically traded at a slight discount to U.S.-produced West Texas Intermediate (WTI) crude. |
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But take a look at the divergence between Brent and WTI since the U.S. shale oil revolution began to take hold in 2011... The spread has grown considerably. Brent crude prices have risen more than 45%, while WTI prices in the U.S. are 15% above where they were two years ago (notwithstanding a couple sharp spikes). |
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The data are undeniable. The U.S. has massive, proven supplies of shale oil... exploration companies like Continental Resources continue to discover new plays like the SCOOP in Oklahoma... and increasing efficiency in shale oil production will swell supplies even further. |
We believe the increasing spread between WTI and Brent, which is a recent phenomenon, is the most compelling market-based evidence that an oil glut will push down prices.
The EIA also said U.S. oil and gas production would be higher than expected over the coming years... The agency forecasts the U.S. will import 34% of its liquid fuel consumption by 2019, down from 45% in 2011. And it says U.S. crude oil production will peak at 7.5 million barrels per day in 2019, before falling to 6.1 million barrels per day in 2040.
It previously forecast production would peak at 6.7 million bpd in 2020. "The growth results largely from a significant increase in onshore crude oil production, particularly from shale and other tight formations," the agency said.
Copper giant Freeport-McMoRan (FCX) yesterday announced its return to the energy sector.
Freeport-McMoRan is a mammoth $30 billion copper and gold mining company. It owns a 90% stake in the gigantic Grasberg mining complex in Indonesia, the world's largest copper and gold mine in terms of recoverable reserves. Thanks to the massive production at Grasberg, the company is the world's largest publicly traded producer of copper.
The company confirmed yesterday that it is spending $9 billion to acquire energy producers Plains Exploration (PXP) and McMoRan Exploration (MMR), a company Freeport-McMoRan spun off in 1994.
McMoRan Exploration's activities include oil and gas exploration, development, and production in the shallow waters of the Gulf of Mexico and onshore in the Gulf Coast region. Plains Exploration (PXP) from Texas, which holds a 31.5% stake in McMoRan Exploration, owns oil and gas properties in California, the Gulf Coast region, Gulf of Mexico, and the Rocky Mountains.
Investors didn't like the news. Evy Hambro, a fund manager at Blackrock who owns a substantial 3.1% stake in Freeport-McMoRan, lashed out on the company's conference call. "Congratulations on making one of the worst teleconferences that I have ever heard to justify a deal," Hambro said. "I haven't heard anything on this call that in any way justifies why these companies should be put together."
Hambro clearly wasn't alone. News of the deal sent Freeport-McMoRan's share price in a tailspin, shaving 15% off its market cap.
While FCX's share price was getting clobbered… McMoRan Exploration shares soared 87%. Plains jumped as well – up 23% for the day. Shareholders in McMoRan Exploration will love the news, as only last week the company suffered a massive selloff – dropping 35% over two days. They've now recouped those losses, plus a healthy gain.
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New 52-week highs (as of 12/5/12): iShares Australia Fund (EWA), Guggenheim China Real Estate Fund (TAO), Vanguard Inflation-Protected Securities Fund (VIPSX), W.R. Berkley (WRB), Alico (ALCO), and Travelers (TRV).
In today's mailbag… a few subscribers weigh in on our new Digest Premium… Send your comments to feedback@stansberryresearch.com.
"The Premium will be a huge success and should drive sales higher than expected." – Paid-up subscriber Daniel
"I look forward to reading this regularly. I hope you can keep it up. Wow!" – Paid-up subscriber Charles Allen
"I did not realize this was a brand new newsletter until I read about it today. From what I have seen so far, it is an excellent letter with input from one of the better analyst in the business. Keep up the good work as all of your newsletter are excellent reading." – Paid-up subscriber Terry L. Streit
Goldsmith comment: We appreciate all the positive feedback for our latest offering, Digest Premium. As we said yesterday, our goal with Digest Premium is to deliver educational and/or actionable advice from Porter on a daily basis. The research is also more in depth than a normal Digest.
You can think of it as receiving a Friday Digest every day…
Porter and his research team put a tremendous amount of effort into Digest Premium… It's not easy to deliver such valuable information on a daily basis. But as you can see from the feedback, we're on track so far.
Today is the first day you can sign up for Digest Premium. (Previously, it was only available to Alliance members and "Capital" level Stansberry's Investment Advisory subscribers.) We're charging a low, monthly rate for the service (less than $0.50 a day). And if you don't enjoy it, you can get a full refund within 30 days, no questions asked.
If you enjoy Porter's writing, Digest Premium is a must. You can sign up here…
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
December 6, 2012
Where the WSJ gets its ideas... Joe Friday: Investor... EIA ditches West Texas Intermediate... Copper giant buying oil and gas assets... 'Congrats on the worst deal ever'... How to get a Friday Digest every day…
In yesterday's Digest Premium, we discussed the tough time Bill Ackman, founder of the hedge fund Pershing Square Capital, is having with his investment in retailer J.C. Penney (JCP). Sales are plummeting and the business model is broken. Plus the business is running out of cash...
We asked Small Stock Specialist editor Frank Curzio about the company's woes. Frank recommended his readers buy J.C. Penney in July, when shares traded for about $20… and he recommended they close out their positions two months later for a total gain of more than 30%.
He gave us some more details on J.C. Penney's recent performance…
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JCP only has $525 million of cash on the balance sheet. That's down 41% from last quarter. The company burned through $380 million in free cash flow last quarter. That will amount to a roughly $1.3 billion burn rate for the year. |
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The company was expected to generate more than $500 million in free cash flow in the fourth quarter. But after another 20%-plus sales decline (Internet sales fell 37%), that's not going to happen. Keep in mind, the sales downtrend is getting worse each passing quarter... not better. |
If the company continues reporting 20%-plus sales declines, it will burn through its cash within nine months.
Frank also sent research from investment bank Credit Suisse about Penney's sales declines. The bank found 17 retailers that reported year-over-year sales declines of 15%-20% between 2000 and 2011... Only four retailers ever recovered the lost revenues. And it took them an average of three years.
The other 13 – 76.5% of the group – never recovered the revenues.
We think J.C. Penney falls into the latter camp...
As we said yesterday… we think Ackman has misjudged the advantage J.C. Penney's collection of stores and real estate represent. His comments likening the changes at J.C. Penney to a dynamic "startup" company make us wonder if the billionaire investor has ever heard of the Internet...
Take a look at this chart comparing the sales growth for the businesses that make up the Morgan Stanley Retail Index – which tracks 31 national retailers – with those of Amazon over the past 10 years... Which looks more dynamic to you?
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Yesterday, we quoted legendary investor Warren Buffett saying bad businesses always defeat capable managers.
In our view… Ackman is stuck with a bad business and an obsolete business model. We wish him the best... but we bet Buffett will be right.
In a situation like this... You could try to profit on J.C. Penney's decline by selling out of the money calls or simply shorting the stock. But it's probably too late. The shares have already collapsed. Instead, it's best to look for the "next J.C. Penney"... a struggling retailer that's likely to follow JCP down. We're looking for a candidate… and will let you know when one presents itself…