Buy the One Ackman Should Have

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Should we care about J.C. Penney (JCP)?

I think you need to care about any large retailer that is on the precipice. Any company that employs thousands of people and used to have $19 billion in revenue is worth following as that's a visible chunk of the U.S. retail economy.

Of course that's NOT the principal reason why it's been so talked about. We have cared because Ron Johnson, a fresh face from the outside, from Apple (AAPL) no less, came in to clean up the mess made by former CEO Mike Ullman -- at least that's what the new party line was -- at the behest of a hedge fund manager Bill Ackman, who had basically taken over the company.

The daring, some would say the arrogance, of Johnson and his backer, Ackman created a polarizing set of  expectations that led to total failure and collapse and the ultimate comeuppance, Johnson's firing, only to be replaced by the allegedly disgraced Ullman.

All that's history and while we can speculate about how this debacle may have hurt the performance of the self-promoting Ackman, who cares? What matters right now is that there's a land grab of retail sales as I genuinely believe that J.C. Penney could go away. I don't want it to go away, but the buffoonery of Johnson opened the floodgates for every other retailer.

So, how do we play it? First, I totally dismiss the notion that J.C. Penney is worth buying, which is something I heard today in conjunction with talk of a private equity takeout. These rumors don't take into account that the debt instruments surrounding J.C. Penney are signaling that the cash flow is dropping, perhaps precipitously here, at a moment where Penney has, most recently, $930 million in cash vs. $2.9 billion in debt. That's totally unsustainable given the -30% comp numbers, numbers that can't easily be reversed by Ullman. You can't own the common stock. It is still a Sell and I think that even Bill Ackman knows that because this is precisely the kind of company he would be selling short if he weren't so darned long.

The biggest winner has been Macy's (M) and I think that a huge chunk of what is left in sales will still go the way of that chain.

Wal-Mart (WMT) and Target (TGT) have gained, but the newfound sales may not be as meaningful to them. Both have been doing fabulously and Wal-Mart again hit its 52-week-high. It's been an amazing performer. I also like TJX (TJX) (my charitable trust owns it), which I find to be similar to Penney's both in the sales it runs and in the merchandise it sells. It should be bought here.

Kohl's (KSS) should be a big beneficiary because of its similar merchandise, but that once-terrific growth retailer seems to have lost its way. I think that Gap (GPS) works too, as its clothing profile is very similar to the clothes that Penney sells. Go check Penney out, you will agree.

I worry about PVH (PVH) because it is a big partner of Penney, although I know that Manny Chirico, the terrific CEO, is never going to let himself be held hostage. But if Penney is doing as poorly as I think, then anyone who has sent them merchandise is at risk.

Why is this a major focus right now? Because we are going to get same-store sales from all of these retailers and we know from Manny Chirico that March was soft because of cold weather. So, you may get your chance to buy these AFTER we hear the numbers.

To me, the cheapest of all of these is TJX. It just boosted its dividend by 26% and announced a buyback of at least $1.3 billion. Put simply, it's the one Ackman should have bought. He didn't. But you can.

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