York's Dinan squares off against Ackman over JC Penney
Hedge fund manager James Dinan is wagering that ailing retailer JC Penney Corp will continue to perform poorly and in the process he is taking on the company's biggest bull, billionaire investor William Ackman.
Dinan, who heads York Capital Management which manages $15.1 billion, this week told an audience at a Morgan Stanley investing conference in New York that the firm is shorting JC Penney's debt, effectively taking a dim view of its future.
That puts Dinan at odds with Ackman and his $12 billion Pershing Square Capital Management hedge fund. Ackman has become a big JC Penney cheerleader since his firm started buying the stock in 2010.
Ackman is now under pressure from big-name investors taking the opposite side on two of his positions - the other being nutritional supplements company Herbalife Ltd in which he has a $1 billion short position and has been battling hedge fund manager Daniel Loeb and legendary investor Carl Icahn, who have both taken long positions.
A spokeswoman for York declined to comment on whether the hedge fund is betting against the retailer's debt.
Morgan Stanley's high yield bond desk is also betting against JC Penney bonds, said a person familiar with the firm. The firm is betting on a decline in the value of the retailer's bonds using credit default swaps.
A Morgan Stanley spokesman declined to comment.
JC Penney is emerging as one of the more difficult trades for Ackman's Pershing Square, which owns 39 million shares, or 18 percent of the company. Ackman joined the board of JC Penney in 2011 and helped bring in Chief Executive Officer Ron Johnson, a former Apple executive, to lead a turnaround of the middle-market retailer and bring in more fashionable merchandise.
That strategy is far from showing signs of paying off and the retailer reported last week that its comparable sales dropped 31.7 percent in the winter holiday season quarter as its move to more upscale product lines failed to catch on with shoppers. As a result, its shares tumbled and are now down 24 percent this year.
A spokeswoman for Ackman did not immediately respond to a request for comment.
York Capital is far from alone in betting against JC Penney. Many hedge fund managers are also shorting the retailer's stock, leaving it to rank as the third most heavily shorted stock on the Russell 1000 Index this week, according to data provided by the Bespoke Investment Group, which tracks the data.
At the industry conference, Dinan did not give details about his JC Penney trade.
Speaking in very general terms, Dinan said his firm uses shorts to hedge the portfolio. Discussing JC Penney's biggest investor, Pershing Square, Dinan said shareholder activism used by Ackman to force changes at a company "works great when the tide is rising."
But he said Ackman seemed to be losing control of his destiny now that Vornado Realty Trust, which started buying when Ackman did, sold half of its JC Penney stake. Vornado's sale was disclosed earlier this week.
With JC Penney's share price sinking, this bet might ultimately prove to be more damaging to Ackman's performance and reputation than his big short bet on nutritional supplement company Herbalife.
With Herbalife, the battle lines seem more sharply drawn as Daniel Loeb and Carl Icahn very publicly took the other side of Ackman's short position. But he still sits on a big gain there, while he has a loss on JC Penney.
Meanwhile, other hedge fund managers have made money shorting JC Penney's stock.
Two managers who shorted the stock said their view is that, while CEO Johnson might be the only man able to resuscitate JC Penney, he could be running out of time for his vision to take hold. Vornado's sale, for example, underscores that investors and possibly board members are running out of patience. Vornado's Steven Roth joined the JC Penney board at the same time as Ackman did.