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Bad JC Penney bet calls Ackman's retail acumen into question

Bill Ackman
David Grogan | CNBC
Bill Ackman

Billionaire investor William Ackman has been tripped up by a bet that he could transform a giant retailer.

His $1 billion investment on J.C. Penney is in tatters as he left the company's board on Tuesday after waging a two-year campaign to revive its tired stores with an upscale make over.

"You learn from mistakes," Ackman told PBS-TV interviewer Charlie Rose, according to a transcript. "Investing is a business where you can look very silly for a meaningful period of time before you're proven right."

(Read more: Ackman quits Penney board; not selling shares)

After an earlier failed attempt to force changes at retailer Target, the Penney wager raises questions about whether Ackman, who has a proven knack for real estate deals, is as skillful in betting on retailers.

"The investments Ackman does well with usually have a healthy real estate component to them," said Damien Park, managing partner at consulting firm Hedge Fund Solutions. "But he has historically struggled when getting more deeply involved with managing fundamental operational issues," as he tried to do with Penney.

After Ackman disclosed his Penney stake in October 2010, he repeatedly told skeptics that they would be shopping at the store when the overhaul was done.

(Read more: Activist investor Ackman makes his biggest bet ever)

As a board member, Ackman coaxed Ron Johnson to leave Apple and run JC Penney in 2011, even calling him the Steve Jobs of the retail industry. But the makeover failed, new shoppers did not come, and the stock price tumbled to $12.68 on Tuesday from $42.44 in early 2012.

Now Ackman and investors in his $11.2 billion Pershing Square Capital Management are sitting on paper losses of more than $350 million.

"Bill Ackman made a very bad bet," said Paul Argenti, a professor at Dartmouth's Tuck School of Business. "He made a lot of mistakes, but some of his ideas were right on, including replacing the CEO. But he picked the wrong horse."

(Read more: J.C. Penney Is Bringing Back Sales)

As Johnson lost confidence among the rank and file and board members planned for his exit in early April, Ackman lost his touch in persuading the board to see things his way, people familiar with the matter said.

His inability in the last months to get things done on the board echo back to the Target investment, where he urged the company to sell its credit card business and make more money from its real estate holdings.

After being ignored, Ackman spent millions on a bitter proxy fight in 2009, but lost his bid to join the board and ended an emotional speech at a shareholders' meeting in tears.

(Read more: Bill Ackman's pain could be your gain, says Cramer)

One of Ackman's special investment vehicles that bet only on Target stock collapsed, losing 90 percent of its value, something that made for angry relations with some rival hedge fund managers who had put money in. By 2011, Ackman turned his back on Target completely, having sold all his shares.

At Penney, Ackman may now be looking for a similar exit, investors and analysts said, even as they noted any large scale sale on his part would likely kick the share price down even more.

A person close to the situation said the hedge fund will not look to make a quick exit from Penney, but rather will wait to see how the stock performs and whether the company can turn its fortunes around. Because Ackman was privy to confidential information about the company as a director, he faces some restrictions on selling stock immediately.

(Read more: Ackman goes to SEC in latest chapter of Herbalife saga)

"He's not going to win every bet," said George Hopkins, executive director of the Arkansas Teacher Retirement System which has $185 million in Pershing Square. He added, however, "The best time to be with him may be when he's down."

What remains to be seen is how Ackman's investors, including pensions and funds of funds, will react to the Penney situation. This is shaping up as a rough year for Pershing Square, which was up 4 percent at the end of July, or about the average performance of most hedge funds. It has also recorded a more than $300 million paper loss on its $1 billion bearish bet against Herbalife.

One investment manager who has clients with Pershing Square said last week several were asking to reduce their allocation to Ackman's fund because they had taken issue with the Penney bet. The manager, who did not want to be identified, said he still had confidence in Ackman but wished he would adopt a lower profile.

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