Cramer: Ackman's Dreadful Picks

 | Aug 19, 2013 | 7:35 AM EDT
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Is the collective future of Air Products & Chemicals (APD), General Growth Properties (GGP), Procter & Gamble (PG), Beam (BEAM) and Herbalife (HLF) hanging on J.C. Penney's (JCP) earnings report Tuesday?

It sure seems like it.

At this very moment, based on my scan of the charts this weekend, the most popular trade has to be the "Bet against Bill Ackman" gambit. You can see it happening in all of this biggest positions -- those for which he's employed his "long and loud" attitude, when he takes stakes and has an axe to grind, and even those positions that he's mum about. Quite simply, there's activity underneath that suggests Ackman can be broken.

So it seems people are gambling that Ackman's Pershing Square fund doesn't have the horses to get through this tough period after his two most visible positions -- long J.C. Penney and short Herbalife -- escalate into doom. But I think that is too risky a concept to take on. Here's why.

We know Ackman has a plan to exit J.C. Penney. We know there's chatter that J.C. Penney is having a good quarter. We know the capital involved in the company has turned minimal because of the downturn in its fortune after the Ron "Ban the Coupons" Johnson debacle. We also know that current CEO Mike Ullman, as weak as Ackman says he is, has the support of the board and certainly of the banks.

If this quarter has been a good one for the company, there'll be no reason for the banks to cut off credit. That means Penney would have no problem getting merchandise for the holiday season, be it on the company's own private label or the higher-priced branded merchandise around which Johnson had tried to build his new strategy.

Will the $400 million -- give or take $10 million, depending on the numbers Tuesday -- really matter to this multi-billion dollar hedge fund? That's the money Ackman might be able to extricate if Penney stays the same, if it reports a decent number. Of course, everything would be better for Ackman if Penney's viability were taken off the table for now, and that's really what's at stake with tomorrow's quarter.

But how do I know that the fate of his biggest positions might be in the balance? First, the ascension of Carl Icahn as a force took a dramatic turn to an even more positive level last week. Apple (AAPL) soared on his Twitter comments that he has a huge stake in the company, relative to his normal positions -- not relative to the market capitalization as a whole, which is Doug Kass's complaint elsewhere in this site. The simple truth is that Carl's up big on Apple, and that's a testament to his power right now and the belief that no one has a hotter hand.

What this means is that, the moment Herbalife issues clean financials (they are only dirty because of the actual rogue actions of the accounting firm doing its auditing), I have to imagine that Icahn will push for an expanded share buyback, or even a Dutch tender offering, that would immediately cause the stock to soar. After the Ackman-led initiative to try to get Herbalife's products taken off the market, or at least tainted in the mind of the public -- and even with The New York Times' huge take-out of the company last week -- Herbalife shares did not get hit. This tells you that, for the moment, without sanctions from the Food and Drug Administration, Herbalife has no reason to fall precipitously. However, it could go up gigantically if the audit is completed on the company's books.

Then there's General Growth Properties, the real estate investment trust that helped propel Ackman to the height of the Great Hedge Fund Man universe. This company, resurrected shrewdly by Ackman, dwells in the shopping-mall section of the REITs -- and I think could be hanging by a thread, given the sudden downfall in the overall REIT sector. Every single player in this now-horrendous bond-market-equivalent group has been shelled by the rapid increase in bond yields -- except General Growth. That's despite a dividend yield of just 2.66%, which is far less yield protection than that of better-run companies like Federal Realty (FRT), Vornado (VNO), Kimco (KIM) and Simon Properties Group (SPG). All of these currently offer yield of more than 3%.

If we see a continued rise in interest rates, I think this group will crack, and in a huge way. It trades pretty much in lockstep with all of the other REITs, which you can easily track via iShares Dow Jones US Real Estate (IYR), and that sector is the worst in the chart book.

I think General Growth is by far the best sell in the group, and that it can easily be matched against any of the players in a hedge. But I think the highest-quality company, Federal Realty, is the natural match-up. The lower-quality Kimco, which sports a 4% yield -- the REIT with the biggest yield differential to Ackman's General Growth -- might also be good for a pair trade. If I were still at my old hedge fund, I would be doing this trade aggressively, even if I didn't know that the weak-handed Ackman had a position in it. That's especially after last week's crummy retail numbers.

I feel the exact same way about Ackman's stake in Air Products, the gigantic position he's just taken in the industrial space. This worst-of-breeder, at least when compared with the almost identical but faster-growing Praxair (PX) and Airgas (ARG), is teetering. The shares are holding just about a key technical level, and I think they can be knocked over with a feather.

Here's why: The real way to affect change at Air Products is to add Ackman to the board of directors -- and, after the J.C. Penney fiasco, who the heck is going to do that?

Perhaps Air Products can be broken up somehow. Maybe the sum of the parts can prop up the stock. But this group could be a short, anyway, if industrial-production numbers begin to roll over -- and, again, the sector has diminished yield support because of the sudden lurching-down of the Treasury market. What the heck are these stocks doing selling at an average of a 19x multiple? They aren't simply growth cylicals, and they can't be trusted if we are to see a downturn in the once-red-hot cyclicals. What a terrific hedge if the market rolls over here. That's particularly for the cyclicals, which have been a stalwart here -- but it certainly won't stay that way if interest rates continue to charge higher.

The technicians are often in charge at a moment when all is in flux, and one of the stocks I have flagged that looks really sick is Beam, the now-overvalued spirits play vs. Diageo (DEO) and Brown-Forman (BF.A). These are two vastly superior enterprises to Beam, as they sport better international and domestic prospects, respectively. Given the concentration in the spirits industry, and after the U.S. Airways (LCC)-AMR fiasco involving the Justice Department, I don't know how Beam could get a takeover bid that would pass muster. It's also very yesteryear to think liquor stocks somehow won't fall from their perch in a broader downturn.

Finally there is Procter & Gamble. In many ways, this is the most vulnerable of all of Ackman's big buys, and the one most prone to profit-taking, even by him.

I regard P&G as a dangerous long here. It offers just a 3% dividend yield to protect it from a downturn, which is a thin piece of threat indeed if the risk-free 10-year U.S. Treasury ticks at 3%, where it certainly seems as though it is headed. This group, including P&G, looks about as toppy as any in the chart book. That makes a ton of sense. First, it is seriously overvalued vs. historic levels. Second, we know there's a diminution of the emerging growth market, the best place for P&G to expand. Don't believe me? Go listen to the commentary on the vastly superior Unilever (UL) earnings call.

Now, there is always the possibility that A.G. Lafley, the CEO who just returned to the helm at P&G, will try to break up the company. But I regard him as nothing more than a caretaker, and I can't see it happening.

So let's add them all up. If you think this market is in the process of rolling over because of rates and the technicals, I can't think of a better place to go short than with the Ackman names. If J.C. Penney pulls the quarter out of the fire, maybe there will be a reprieve to the portfolio. But if bonds keep going lower? Perhaps it just won't matter, and you'll have a legitimate free-fire zone going, because I can't think of a worse portfolio to have at this very moment than what Ackman's Gotham has been able to cobble together.

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