J. C. Penney (JCP) has been decimated over the past several years. Nothing has gone right for this company in a long time. Not even the activist approach of Bill Ackman was helpful. Ackman was buying shares in the high teens and low $20's but ultimately threw in the towel and dumped them at $12.
JCP shares fetch less than $6 today, valuing the company at $1.8 billion, or 66% of the tangible book value of $2.6 billion. Perhaps true book value is overstated because of inventory value, but JCP also sits on property and real estate that is stated on the books for $5.7 billion.
This column is not, however, about the valuation of JCP per se, but with the fact that it is a beaten down security being left for trash. Today's valuation has nothing to do with business but more to do with the uncertainty as to whether JCP will have to raise additional liquidity. Equity capital would be very expensive and highly dilutive to shareholders.
When I look at which stocks were top performers in 2013, the names that show up are Best Buy (BBY) up 239%, grocer SUPERVALU (SVU) up over 160%, Delta Airlines (DAL) up over 150%. Of course if you bought American Airlines (AAL) during bankruptcy in 2013, shares climbed 3,100% from that level but that's an extreme example.
The point is that J. C. Penney shares are not accurate today. They may be worth less, they may be worth more. If more, it's likely going to be substantially more because right now shares are being treated as if it were a going concern. The same goes for other names like RadioShack (RSH) and McDermott International (MDR) that continue to languish. The consensus is so negative that even the most mediocre of surprises on the upside could send shares significantly higher.
At some point, you could have looked at American Airlines last year and concluded that the probability of an equity wipeout was getting lower and lower. You didn't need buy shares for pennies to do well. You could have bought much later and still taken a 100% to 200% gain.
With stocks at elevated levels, it is time to look at some of this market "garbage" and see if any of it is actually treasure. The effort is well worth it. The upside is exponential. Without even the market noticing, JCP shares could be back around $12.
The market is littered with the colossal failures of many more companies that could not survive. For each Best Buy, you have several Circuit Cities. But the effort is well worth. Even Sir John Templeton saw the value in buying distressed securities when he bought 100 shares of every company trading on the NYSE for less than $1 a share. Three years later, he tripled his money.