Suvretta cites big gains with J.C. Penney short, consumer stocks

Reuters

By Jennifer Ablan

Jan 16 (Reuters) - Suvretta Capital Management, founded by a former portfolio manager for billionaire investors George Soros and Steven A. Cohen, told clients on Thursday that its bet against shares of J.C. Penney Company Inc. helped contribute to solid returns in the last two years.

"On the short side, we have now generated profits three times (generating a total return of approximately 130 percent) in the past two years with our J.C. Penney positions," Suvretta Chief Investment Officer Aaron Cowen said in a client letter obtained by Reuters.

Cowen, who was a former portfolio manager for Soros Fund Management and SAC Capital Advisors, said his $700 million-plus Suvretta Capital Management generated net returns of 8.9 percent for the fourth quarter and net returns of 26.3 percent for 2013.

Soros Fund Management, which invests about $20 billion on his and his family's behalf, announced a large stake in J.C. Penney shares in early 2013 and began adding to its exposure as the year went on to become the retailer's second-largest investor at one point.

The stock price of J.C. Penney, one of the oldest retailers in the nation, has lost 80 percent in the last two years.

J.C. Penney said on Wednesday that it would close 33 stores across the country and shed about 2,000 jobs. The announcement indicated that the considerable management and investment turmoil of the last few years is not over. J.C. Penney fired one chief executive officer, Ron Johnson, last year and then brought back his predecessor, Myron E. Ullman III.

"As we have written in the past, we have been amazed by how poorly JCP's strategic change negatively affected the business and by the inability of the Street to understand the magnitude of this failure," Cowen wrote. "This strategic failure, along with headwinds we have seen in the middle end of the consumer market, was a powerful punch to JCP's business in the past year."

Cowen isn't bearish on all things consumer. He said in his letter that in 2013, Suvretta generated solid returns on its long positions in Dollar Tree Inc and Dollar General Corp, given the firm's positive view on serving the low-end consumer niche and the market's short-term bearishness on the low-end consumer due to the expiration of the payroll tax.

"We like both of these investments, not only because the dollar store niche is under served and has a lot of expansion opportunity, but also because of the excellent management teams that are very shareholder friendly," he said.

Suvretta also initiated a long position in Chipotle Mexican Grill Inc in the fourth quarter of 2012 when the firm felt that the multiple had compressed to the low end of its historical price-to-earnings range; the "bear thesis" that Chipotle is the same as Taco Bell was unfounded and that the restaurant chain's management was inclined to raise prices, which would boost both same-store sales and margins.

Chipotle shares, which were recommended as short investment ideas by David Einhorn of Greenlight Capital and Jeffrey Gundlach of DoubleLine Capital, are up roughly 80 percent over the last year.

Cowen said that as Chipotle management started to invest more in marketing and began to roll out catering, Suvretta believed Chipotle's multiple and earnings had a lot of room to expand. And though the increase in pricing was delayed until 2014, the thesis actually improved as 6.2 percent comparable- store sales growth in the third quarter proved that Chipotle "had lots of levers left to pull, and the delayed pricing would result in a stronger moat versus weaker competitors who needed to raise prices to offset food inflation," Cowen wrote.

While Suvretta has since exited its position, it is not because the firm has become bearish on Chipotle, Cowen said.

"We believe it still offers a compelling, long-term investment. However, at 40x P/E and 20x EBITDA, the risk-reward has become less compelling. We have rotated capital into another restaurant investment, Burger King."

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