By The Sizemore Letter<\/u><\/p>\n
For a staid old department store with a 111-year-old history, JC Penney Company (<\/span>JCP<\/a>)<\/span><\/b> has been in the news a lot this year, though not for any noteworthy operational developments; the retailer continues its slow march into irrelevance, and it\u2019s not likely to change course any time soon.<\/p>\n The headlines have mostly surrounded one particularly vocal shareholder, Bill Ackman<\/a><\/strong> of Pershing Square Capital, who owns about 18% of the company.\u00a0 Up until recently, Ackman was also on the JC Penney board of directors\u2026until he resigned in a hissy fit after demanding that the company replace its CEO within 45 days.\u00a0 And this after Ackman\u2019s choice for the job\u2014former Apple (<\/span>AAPL<\/a>)<\/span> executive Ron Johnson\u2014ran the company into the ground.<\/p>\n Ackman likes to think of himself as a \u201cshareholder activist\u201d who shakes up complacent or self-serving company boards and unlocks value for shareholders.\u00a0 But to his detractors, he is nothing more than a corporate raider\u2014a pirate in a suit that loots and leaves.\u00a0 JC Penney Chairman Thomas Engibous called him \u201cdisruptive and counterproductive.\u201d\u00a0<\/strong>\u00a0 And given Ackman\u2019s recent behavior, it\u2019s hard to argue with the chairman.<\/p>\n All of this brings me to Penney\u2019s new \u201cpoison pill\u201d provisions<\/a><\/strong>.\u00a0 After the Ackman experience, JC Penney never again wants to become the personal plaything of a hedge fund titan.\u00a0 For those unfamiliar with the term, a poison pill floods the market with new stock in the event of a hostile takeover.\u00a0 It makes it impossible\u2014or at least very expensive\u2014for a corporate raider to take over a company without management\u2019s blessing.\u00a0 The Penney poison pill would kick in whenever an outside shareholder acquired 10% or more of the company\u2019s stock.<\/p>\n And this is where the theater of the absurd starts.\u00a0 The poison pill is being called a \u201cshareholder rights\u201d <\/b>plan by management.\u00a0 So, we have a \u201cshareholder rights\u201d plan being implemented to protect investors from \u201cshareholder activists\u201d like Ackman.\u00a0 If you\u2019re a Penney shareholder, you must really feel special.\u00a0 It looks like everyone is looking out for your best interests.<\/p>\n Except that they\u2019re not.\u00a0 Corporate raiders like Ackman\u2014and some of his high-profile rivals like Carl Icahn<\/a> and Daniel Loeb\u2014are absolutely correct when they say that corporate managements tend to run companies for their own benefit rather than for the benefit of the shareholders.\u00a0 In business school they call it the \u201cprincipal-agent problem<\/a>,\u201d but we don\u2019t need to get bogged down in fancy terminology.\u00a0 Unless motivated by altruism or idealism, people tend to look out for number one first.<\/p>\n So if management are the \u201cbad guys,\u201d does that make Ackman & Co. the \u201cgood guys.\u201d<\/p>\n If you believe that then you have no business investing.\u00a0 \u201cShareholder activists\u201d may inadvertently help smaller shareholders by driving up the stock price after successfully engineering a reorganization of the company.\u00a0 But they do so for their own benefit, not yours.\u00a0 This is Wall Street\u2026not charity.<\/p>\n So, now that I have sufficiently jaded your view of humanity, what are we to do with this information?\u00a0 Should we view poison pills favorably\u2026or should we run away screaming when a company we own implements one?<\/p>\n I would frame it like this: If you\u2019re investing in well-run companies, it generally won\u2019t matter. \u00a0Good companies with healthy prospects generally don\u2019t need poison pill provisions. \u00a0Yes, Bill Ackman made a mess of JC Penney.\u00a0 But JC Penney was already a company in terminal decline long before Ackman got his paws on it.\u00a0 Rather than waste your time and capital on an investment in Penney, you could have invested in a healthier rival like Wal-Mart (<\/span>WMT<\/a>)<\/span> <\/b>or Target (<\/span>TGT<\/a>)<\/span><\/b>\u2014both of which are monster dividend raisers and share repurchasers.<\/p>\n And Wal-Mart is a fine example of the next point I\u2019d like to make.\u00a0 If your last name is Walton, then your livelihood disproportionately depends on the performance of Wal-Mart.\u00a0 The same would be true of Michael Dell and Dell Inc. (<\/span>DELL<\/a>)<\/span><\/b>.\u00a0 When your name is on the signage, the company\u2019s destiny is your destiny; you can\u2019t simply walk away.\u00a0 But outside investors\u2014and particularly regular, individual investors\u2014have the luxury of voting with their feet.\u00a0 If you don\u2019t like the way a company is run, don\u2019t waste your time in a shareholder proxy fight that you can\u2019t realistically influence.\u00a0 Sell the shares and allocate your funds elsewhere.<\/p>\n Finally, while you should always assume that a large high-profile investor is investing for their own benefit and not yours, it doesn\u2019t mean you can\u2019t tag along for the ride.\u00a0 I regularly look at the trading moves made by my favorite money managers<\/a>.\u00a0 But be careful here and choose your gurus and their picks wisely.\u00a0 Yes, Carl Icahn is a smart investor, and yes, tracking his trading moves can be insightful.\u00a0 But I would steer clear of some of his recent high-profile buys like Dell and Herbalife (<\/span>HLF<\/a>)<\/span>.<\/b> Both have become battlegrounds for hedge fund titans, and as an individual investor you have a serious information disadvantage.<\/p>\n Disclosures: Sizemore Capital is long WMT.<\/p>\n