Talking Numbers

Could another activist be in JC Penney?

Could another activist be in JC Penney?

Long-suffering JC Penney just took some steps to scare off anyone trying to take over the company as it struggles to survive.

Investors buying more than 4.9% of the company would require approval from the board of directors. Should such investors try to circumvent the board, a so-called "poison pill" would automatically flood the market with additional shares, thereby diluting the holdings of anyone trying to take over the company.

That 4.9% number didn't come out of nowhere. According to the company, it was the level necessary to prevent anyone from compromising JC Penney's net operating loss carryforwards (NOLs) with the IRS. NOLs are losses that can be applied to future profits so the company doesn't have to pay high taxes.

Well, that is, if JC Penney ever gets around to making a profit again; it hasn't done so since the end of 2011. In the meantime the company has accumulated over $2 billion in NOLs. Just in case, though, JC Penney wants to keep those NOLs (which are a deferred tax asset) rather than lose them. In a statement, JC Penney says:

"The Company's ability to use its NOLs would be substantially limited if an 'ownership change' under Section 382 of the Internal Revenue Code were to occur. Ownership changes under Section 382 generally relate to the cumulative change in ownership among stockholders with an ownership interest of 5% or more (as determined under Section 382's rules) over a rolling three year period. The amended rights plan was adopted by the Board to reduce the likelihood of an 'ownership change' occurring."

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Currently, there are three major shareholders with more than 4.9%. State Street, Soros Fund, and Vanguard each own a bit more than 6%. Should any of them buy more shares, they may trigger the poison pill as well.

Then again, it may also be a convenient excuse to never have to deal with the likes of activist shareholder Bill Ackman ever again. Over the summer, Ackman's Pershing Square fund sold its 39 million shares – about 10% of the company – after he spent years trying to remake the company in his own image. That included putting in Ron Johnson as CEO at the end of 2011. With Johnson in charge, the company lost money every quarter and still does so nearly a year after his ouster. So, in a way, JC Penney has Bill Ackman to thank for those NOLs in the first place.

Is there any reason why an investor should even bother buying so much as a single share of JC Penney, a stock that has lost 85% in the last two years?

"None at all," says portfolio manager John Stephenson of First Asset Investment Management on CNBC's Street Signs' Talking Numbers segment. "The fundamentals are atrocious. I hate it."

"They're going to burn through $2.6 billion in cash this year," says Stephenson. As of its most recent quarter, it has about $1.2 billion in cash and short-term investments. "It's a real concern if this thing will actually exist in a year or two because it's going through so much cash. It's got a very high-levered balance sheet. I see absolutely no reason to be here."

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However, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, sees a very short-term opportunity to make money in the stock.

"Last time we spoke about JC Penney, I said there was no price at which I would own the stock," says Ross. "I'm going to soften my stance a little bit and actually be a small-sized buyer."

The stock's support level is at about $6, or $0.42 below its Tuesday close, according to Ross. He sees JC Penney's share price as being tested with a double bottom pattern first in October and then again in recent days. For that reason, he cautions investors to put in tight stops if they do buy the stock.

"You want to be a buyer in here with your risk extremely well-defined around that $6 - $6.25 level," says Ross. "Use that as your protective stop. Once again, it's not all rainbows and unicorns out there."

On a long-term chart of the stock, Ross sees a 13-year complex head and shoulders pattern. That bodes poorly for shares of JC Penney.

"If this stock doesn't go out of business, it's a nice brand name," says Ross. "There could actually something here…. If this (short-term) double bottom holds, you could see a nice rally back into $8 - $9. That's nice upside from current levels."

To see the rest of the discussion on JC Penney with Stephenson on the fundamentals and Ross on the charts, watch the video above.

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