Counter-Take: J.C. Penney Offering Was Just to Get Rid of Short Sellers

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J. C. Penney Co. Inc. (NYSE: JCP) has done serious damage yet again to its reputation. Earlier in the year its finances were said to be just fine. Then a fresh report from Goldman Sachs that the company likely would run into financial problems next year created a new sense of panic. To combat the concerns, J.C. Penney decided to sell 84 million shares at $9.65 per share.

The move may have bolstered its books, but maybe this was an underhanded way of cleaning up the short sellers out of the stock in the coming weeks. Nasdaq’s latest short interest tables released this week (from mid-September) showed a year-high level of some 71.7 million shares, and it was the fourth consecutive gain in the short interest.

What anyone would have to ask is simply “Who would buy the J.C. Penney offering, and why?” Most likely, some of the biggest buyers were also among the top short sellers. Some short selling investors have been short this stock since the $30s. The 52-week trading range is $9.25 to $27.00. This week was effectively the lowest reading in years and first time that the stock had broken down under $10 since 2000 or 2001.

Even if nothing has worked in years, the reality is that some short sellers may use this as the “freebie exit” to cover at least a portion of their short sales. The short sellers who are betting that the stock goes to zero can still take profits along the way to ensure gains. Besides, letting it all ride with the hope of “zero” would be considered pigging out or being too greedy even by short-seller terms.

J.C. Penney is a busted business but it has assets and enough property to go on fighting. We cannot see how the retailer can save itself, but any short seller knows only too well that retailers can survive for years and years while they remain in trouble.

All things being equal, this company remains challenged and we think that even more damage has been delivered with this share offering.