Pershing Square has just released their Q3 letter to shareholders (its a bit surprising, as the hedge fund usually releases letters a bit later. The founder of Pershing, Bill Ackman, discusses his decision to sell J.C. Penney Company, Inc. (NYSE:JCP) and his strong conviction regarding his short of Herbalife Lt.d (NYSE:HLF). Bill Ackman personally attacks long time Herbalife bull Tim Ramey, who we have mentioned many times on ValueWalk as being a bit of an agitator. Below is a brief excerpt followed by the full letter in scribd.
Bill Ackman on J.C. Penney Company, Inc. (NYSE:JCP)
J.C. Penney We chose to exit our entire stock and total return swap position in J.C. Penney at the end of August and incurred a loss of approximately 50% of our original investment. We did so because of a disagreement with the board about the timing and necessity for a CEO change at the Company, the valuation implied by the then stock price, and the risk of a successful turnaround.
Turnarounds are inherently risky and require a totally aligned board of directors, a CEO with substantial turnaround experience, and the support and confidence of all stakeholders. Without all of these ingredients, we are bearish on J.C. Penney’s prospects.
Bill Ackman on Herbalife Ltd. (NYSE:HLF)
During the quarter, Herbalife stock price rose from approximately $45 to $70 per share, and from approximately $60 to $70 per share during the month of September alone. The principal driver of the stock price appears to be the belief by bulls that government regulators will do nothing, and that the Company will continue to generate strong earnings and cash flows which will be returned to shareholders in the form of share repurchases, which could force shorts, including Pershing Square, to cover.
The stock price appreciation this past month appears to have been driven by commentary from Tim Ramey, a perennially bullish Herbalife analyst from D.A. Davison, who stated a few weeks ago that in September 2013 PriceWaterhouseCoopers (PwC) would complete its re-audit of the Company’s last three years of financial statements, and Herbalife, shortly thereafter, would launch a $2 billion investment grade bond issue at an interest rate of 4%, the proceeds to be used to fund a share repurchase at $75 per share. According to Ramey, the buyback would serve to refute the bear case on Herbalife as shorts, including Pershing Square, are forced to cover.
The high degree of specificity of Ramey’s bullish call has led investors to believe that he is speaking on behalf of the Company. While September has come and gone without PwC’s completion of Herbalife’s re-audited financials, bullish investors apparently continue to expect the re-audit to be completed shortly, and a large buyback to be forthcoming.
Big H/T @firstadopter