In early November I bought JCP thinking I was getting some decent value at $8 a share. My analysis seemed correct as it rose to $10 in a month! Then the new year came and crushed everything. JCP's down about 40% this year and I am stuck at a crossroads on what to do. Am I a victim of a value trap? Or taking one out of Buffett's theory, should I load up on more shares?
What about a big dog like AAPL? Trap?
Or a smaller company like TITN? Growth through acquisition loaded with debt and terrible OCF.. Trap? Bankrupt? or just cheap?
"Never try to catch a falling knife?". How do you know when the knife has hit the ground?
Just looking for experienced input on how you notice and distinguish a value trap vs. a cheap stock.
Thanks!
And I always think of this guy when I feel its a value trap
(big fantasy football fan)
Everyone has their own idea of what a "value trap" constitutes. In the case of JCP, the stock is so discussed, so overanalyzed, and has lost so much value over the past few years, that investor sentiment is really the only thing that really matters. It doesn't matter if you think the stock is worth $10. If investors don't think the company will exists at the end of the year, then you better not stand in front of that train.
Buffett (mainly) focuses on companies who are not in nearly such a distressed state as JCP or BBRY and thus can feel comfortable when shares go down because he has a rough idea of what the market will value the sucker at in 2-5 years. Thus, a dollar-cost averaging strategy works great in that case. An investment in a troubled asset better have an exit plan behind it (not willing to lose more than 25% of initial investment, only a short-term trade, etc.) that can hold up if things get even worse.
I don't think AAPL is necessarily a value trap, as it has very strong proponents behind keeping the stock above the $450-$500 range. It'll continue to pay a decent dividend and may even surprise us with a sudden growth spurt (i.e. MSFT). I'd rather call it dead money as I don't see any immediate strong catalysts to significantly alter the momentum of the stock.
And you'll never know when the knife has stopped falling. If you have a few strong fundamental change within the company (new experienced CEO, large outside investment by reputable peeps, etc.), then you should feel more comfortable with starting a position. Helps even more with the media start throwing $0-$5 PT's at something.
It also depends on how you define "value". Where is the value in JCP?
I'm not an experienced investor by any means, but here's what I say.
First, are you actually buying a good business that you think will prosper over the long run? Or are you buying a crappy business with poor long-term prospects just because you think it's cheap? Plenty of successful investors are in either camp but with Buffett he has moved over time towards buying good businesses at decent prices.
If you are buying a bad business with poor long-term prospects, even if it's cheap, you have to recognize that these kinds of businesses will destroy value over time rather than accrue value. So even if you think the company is undervalued right now, your objective as a shareholder is to get as much cash out of the business as you can quickly, before value is diminished over time due to a poor business model. So in these situations, if you don't see an immediate catalyst to bringing value to shareholders, I'd be concerned that the company will continue to decrease in value over time to the point it is no longer attractive. Meanwhile, the "good business" that may have not been as cheap will have increased in value.
For example, SHLD may have made sense as a real estate play just looking at NAV vs price, but it is a business whose operations are bleeding money over time and it's not easy to monetize real estate and other long-term assets quickly.
So basically, I think investment theses which rely purely on asset value can be "value traps" because liquidation is a lot harder in reality than it appears looking at a balance sheet, and in the meantime you're holding a declining asset.
Everyone above has added lots of great insight. One thing I personally do is ensure that they're fundamentally sound. In the case of JCP the fact of them being a going concern is questionable. They do have assets that can be liquidated but the business model/retail is changing.
Furthermore, getting involved in stocks such as HLF, JCP, and the likes are asking to get burnt. Especially when big fund managers move the markets for no apparent change in intrinsic value. The first rule about investing is 'do not lose money'. So, better to play it safe than piss it away on something that is cheap (for good reason) rather than undervalued.
Since I actually have come calls on JCP, I'll step in here and add a few thoughts for you.
Firstly, I don't think JCP is a stock for a 'value' investor so to speak. It is a playground for risk junkies who don't have a casino nearby. The problem here is that they are just another big box store who has failed to come into the 21st century and maybe even the 20th century. The products they sell are very, very similar to items at Sears, Macy's, Boscovs, Bon-Ton etc. Even Target is starting to infringe on that low-ish end retail space. The reason many of these stores are still around are that they are anchors in malls and have been for a long time. People shop there, but nowadays with online competition etc I'd argue only one or two will survive. This already gets me to a bigger question than valuation, it's where will the market be for these stores in 5 years and is JCP going to be one of them that make it there. So beyond just the valuation piece you have the long term trend of the marketplace and a larger question of what retailers there are room for in the world. Frankly, I don't think a mall needs a JCP, Bon-Ton, and a Sears in one shopping center. I don't see much difference between them. Macy's is slightly different because they slide into some middle tier offerings (Ralph Lauren, Lacoste) depending on the location of the stores.
So that leads me back to the original point that I don't think JCP is a value stock. I think that you need to re-evaluate whyyou bought it in the first place and what 'value' you were getting. Why are you long the stock? Is the company going to turn itself around, slim down it's footprint and totally reinvent itself so you are in it for the long haul? If you can't articulate why that will happen sell it immediately. Don't think about it. Dump it. Always be re-evaluating your positions on a daily or weekly basis. I'll admit, I am a trader rather than an investor so my thinking is a bit more skewed on this. I know you were talking about doubling down so I'll also throw this out there. Don't be afraid to take losses. Earlier is better than later, especially when something starts moving hard against you.
Sorry, that got a little long winded but I think when you are looking at JCP it is not as simple as trying to stick a value on the company. You also have to be cognizant that when you are looking at a company which has been slammed that hard there is a ton of noise, volatility, in the stock. It starts swinging around because traders dive in and, well, you know how that goes.
Falling knives are a bit trickier because you are bringing into play less value/investor ideas and more trading/technical/sentiment concepts. I would avoid those stocks if you are an investor because you can quickly get your face ripped off if you aren't actively trading it.
I could keep going but I need to get back to work. Haha. Hopefully that made some kind of sense.
Ask yourself, is JCP a stock I would like to own for the next year or two? The answer is obvious so follow ^ this advice.
If you are doing some sort of book value analysis then forget about it. That's assuming 100% liquidation value or 100% accounting value which is not going to happen in this case. They'll get what, 50% of book at most?
@finance_king
I would argue less. They would need to liquidate quickly; imagine hundreds of millions of dollars of merchandise. Most logical buyers are discount retailers (BIG) or intl whole salers. In short, I believe the risk here is not worth the reward. Same thing with radio shack
What are you thinking? 30% for inventory. What about for PPE? I'm not sure what they own but figure the long-term assets can fetch closer to 50%. I'm just guessing here. Would love to hear what people think.
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