Should you bet against Ackman's dreadful picks?

I can't think of a worse portfolio to have right now than what the hedge fund manager has been able to cobble together.

By Jim Cramer Aug 19, 2013 10:22AM

thestreet logoIs the collective future of Air Products & Chemicals (APD), General Growth Properties (GGP), Procter & Gamble (PG), Beam (BEAM) and Herbalife (HLF) hanging on J.C. Penney's (JCP) earnings report Tuesday?

 

It sure seems like it.

 

At this very moment, based on my scan of the charts this weekend, the most popular trade has to be the "Bet against Bill Ackman" gambit. You can see it happening in all of this biggest positions -- those for which he's employed his "long and loud" attitude, when he takes stakes and has an axe to grind, and even those positions that he's mum about. Quite simply, there's activity underneath that suggests Ackman can be broken.

So it seems people are gambling that Ackman's Pershing Square fund doesn't have the horses to get through this tough period after his two most visible positions -- long J.C. Penney and short Herbalife -- escalate into doom. But I think that is too risky a concept to take on. Here's why.

 

We know Ackman has a plan to exit J.C. Penney. We know there's chatter that J.C. Penney is having a good quarter. We know the capital involved in the company has turned minimal because of the downturn in its fortune after the Ron "Ban the Coupons" Johnson debacle. We also know that current CEO Mike Ullman, as weak as Ackman says he is, has the support of the board and certainly of the banks.

 

If this quarter has been a good one for the company, there'll be no reason for the banks to cut off credit. That means Penney would have no problem getting merchandise for the holiday season, be it on the company's own private label or the higher-priced branded merchandise around which Johnson had tried to build his new strategy.

 

Will the $400 million -- give or take $10 million, depending on the numbers Tuesday -- really matter to this multi-billion dollar hedge fund? That's the money Ackman might be able to extricate if Penney stays the same, if it reports a decent number. Of course, everything would be better for Ackman if Penney's viability were taken off the table for now, and that's really what's at stake with tomorrow's quarter.

 

But how do I know that the fate of his biggest positions might be in the balance? First, the ascension of Carl Icahn as a force took a dramatic turn to an even more positive level last week. Apple (AAPL) soared on his Twitter comments that he has a huge stake in the company, relative to his normal positions -- not relative to the market capitalization as a whole, which is Doug Kass's complaint elsewhere in this site. The simple truth is that Carl's up big on Apple, and that's a testament to his power right now and the belief that no one has a hotter hand.

 

What this means is that, the moment Herbalife issues clean financials (they are only dirty because of the actual rogue actions of the accounting firm doing its auditing), I have to imagine that Icahn will push for an expanded share buyback, or even a Dutch tender offering, that would immediately cause the stock to soar. After the Ackman-led initiative to try to get Herbalife's products taken off the market, or at least tainted in the mind of the public -- and even with The New York Times' huge take-out of the company last week -- Herbalife shares did not get hit. This tells you that, for the moment, without sanctions from the Food and Drug Administration, Herbalife has no reason to fall precipitously. However, it could go up gigantically if the audit is completed on the company's books.

 

Bill Ackman, CEO and portfolio manager of Pershing Square Capital Management, L.P., on May 8, 2013Then there's General Growth Properties, the real estate investment trust that helped propel Ackman to the height of the Great Hedge Fund Man universe. This company, resurrected shrewdly by Ackman, dwells in the shopping-mall section of the REITs -- and I think could be hanging by a thread, given the sudden downfall in the overall REIT sector. Every single player in this now-horrendous bond-market-equivalent group has been shelled by the rapid increase in bond yields -- except General Growth. That's despite a dividend yield of just 2.66%, which is far less yield protection than that of better-run companies like Federal Realty (FRT), Vornado (VNO), Kimco (KIM) and Simon Properties Group (SPG). All of these currently offer yield of more than 3%.


If we see a continued rise in interest rates, I think this group will crack, and in a huge way. It trades pretty much in lockstep with all of the other REITs, which you can easily track via iShares Dow Jones US Real Estate (IYR), and that sector is the worst in the chart book.

 

I think General Growth is by far the best sell in the group, and that it can easily be matched against any of the players in a hedge. But I think the highest-quality company, Federal Realty, is the natural match-up. The lower-quality Kimco, which sports a 4% yield -- the REIT with the biggest yield differential to Ackman's General Growth -- might also be good for a pair trade. If I were still at my old hedge fund, I would be doing this trade aggressively, even if I didn't know that the weak-handed Ackman had a position in it. That's especially after last week's crummy retail numbers.


I feel the exact same way about Ackman's stake in Air Products, the gigantic position he's just taken in the industrial space. This worst-of-breeder, at least when compared with the almost identical but faster-growing Praxair (PX) and Airgas (ARG), is teetering. The shares are holding just about a key technical level, and I think they can be knocked over with a feather.

 

Here's why: The real way to affect change at Air Products is to add Ackman to the board of directors -- and, after the J.C. Penney fiasco, who the heck is going to do that?

 

Perhaps Air Products can be broken up somehow. Maybe the sum of the parts can prop up the stock. But this group could be a short, anyway, if industrial-production numbers begin to roll over -- and, again, the sector has diminished yield support because of the sudden lurching-down of the Treasury market. What the heck are these stocks doing selling at an average of a 19 times multiple? They aren't simply growth cylicals, and they can't be trusted if we are to see a downturn in the once-red-hot cyclicals. What a terrific hedge if the market rolls over here. That's particularly for the cyclicals, which have been a stalwart here -- but it certainly won't stay that way if interest rates continue to charge higher.

The technicians are often in charge at a moment when all is in flux, and one of the stocks I have flagged that looks really sick is Beam, the now-overvalued spirits play vs. Diageo(DEO) and Brown-Forman (BF.A). These are two vastly superior enterprises to Beam, as they sport better international and domestic prospects, respectively. Given the concentration in the spirits industry, and after the U.S. Airways (LCC)-AMR fiasco involving the Justice Department, I don't know how Beam could get a takeover bid that would pass muster. It's also very yesteryear to think liquor stocks somehow won't fall from their perch in a broader downturn.


Finally there is Procter & Gamble. In many ways, this is the most vulnerable of all of Ackman's big buys, and the one most prone to profit-taking, even by him.


I regard P&G as a dangerous long here. It offers just a 3% dividend yield to protect it from a downturn, which is a thin piece of threat indeed if the risk-free 10-year U.S. Treasury ticks at 3%, where it certainly seems as though it is headed. This group, including P&G, looks about as toppy as any in the chart book. That makes a ton of sense. First, it is seriously overvalued vs. historic levels. Second, we know there's a diminution of the emerging growth market, the best place for P&G to expand. Don't believe me? Go listen to the commentary on the vastly superior Unilever (UL) earnings call.

 

Now, there is always the possibility that A.G. Lafley, the CEO who just returned to the helm at P&G, will try to break up the company. But I regard him as nothing more than a caretaker, and I can't see it happening.

 

So let's add them all up. If you think this market is in the process of rolling over because of rates and the technicals, I can't think of a better place to go short than with the Ackman names. If J.C. Penney pulls the quarter out of the fire, maybe there will be a reprieve to the portfolio. But if bonds keep going lower? Perhaps it just won't matter, and you'll have a legitimate free-fire zone going, because I can't think of a worse portfolio to have at this very moment than what Ackman's Gotham has been able to cobble together.

 

Cramer

 

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long AAPL.  

 

 

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42Comments
Aug 19, 2013 11:40AM
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CEO's, CFO's, CIO's.... etc. etc. make too much money for the contribution they provide.

 

True - Thumbs up

False - Thumbs down

Aug 19, 2013 11:56AM
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I think Fatty's box just rolled off the ledge, under the bridge near the 101.

Him and the bag lady were probably engaging in the nasty...Ms. Bambi I think you can do better,

Aug 19, 2013 11:44AM
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How about a little compromise with the Socialist and Capitalist.......... We have the minumum wage why not make a maximum wage. Not for the creators like Jobs or Dell etc. but for CEO's, CFO's etc. These guys have too much to say about their wages through crooked boards.

Aug 19, 2013 12:52PM
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Interesting comments about CEO compensation.  If a guy starts a company and builds it up, he should make whatever he wants to make.   But with a CEO of a public company, things start to get shady.  If you tie compensation to performance, then they do crazy stuff just to make to quarterly numbers look good at the expense of the long-term health of the company.  We shouldn't reward that.  But if you don't give them any skin in the game, what incentive does a CEO have to produce?

Perhaps we've all been fooled.  A publicly traded company is public in the sense that anyone with enough money to buy a share can easily do so, and become an "owner".  But in all practicality, Joe Q. Public has no real opportunity to control any of the decisions about the board, compensation, etc..., even if he invests a couple of million bucks in the stock of a company.  In reality, we have a bunch of "public" companies that are controlled by a very few number of people.

Aug 19, 2013 12:02PM
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What Cramer SHOULD be discussing today... Apple stock was UP 11% last week just because Icahn blathered something about it. It represents the only reason NASDAQ is UP so far today. Doesn't it occur to people that NO amount of knowledge moves stocks? Just billionaire blathering does. With so many of them reaching ages where they wake up surprised they do... the fact remains, when they go, your stock portfolios do too.
Aug 19, 2013 1:17PM
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"Mr. Brucey" is Mr. Fat Cat's 45 year old stuffed bear. It's been his Wing Man for decades, which is why MFC still lives in his mom's basement.

 

"Mommy... Mr. Brucey say for you to STFU... awww, do I have to hand-clean your undies AGAIN for a week?"  

Aug 19, 2013 10:41AM
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I can best describe Ackman's actions as reckless.  If he has it he wins and if not another victim of the bear that many think is hibernating.  Everyone loses in a bear market.  He may just hurry it along with just a few huge reckless plays.  Like the gambler in Vegas he is trying to win it all with one giant roll.  You have to hand it to the guy though, most guys his age are conservative wealth protectors but not him.
Aug 19, 2013 11:13AM
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Bla bla bla and if bla bla bla then bla bla bla.......... Only thing that matters now is the QE rug being pulled out from under the fake market or not............. I will say that if this cat Cramer is dis'ing is counting on a Christmas feeding frenzy at JC Penny to make his fortune....... he's screwed.
Aug 19, 2013 12:46PM
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Ever hear a working girl suggest she could take care of your fat cat for the right price.

Aug 19, 2013 2:54PM
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CEO compensation is at best, a con-job to Shareholders, Workers and the Public.

 

Buried in the packages besides salary. Are:

Outright Stock awarded.

Options to purchase stock at specific prices...Long term or short.

Other performance Bonuses, of cash or stock...

Travel and transportation, expenses that cover most all items.

Housing and Homes, along with majority of maintenance.

Travel on vacations for family, to junkets(meetings) or exotic venues..

And best of all, a license or card to be able to steal what ever else they can.

Aug 19, 2013 11:31AM
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Yup the QE Rug, is becoming somewhat discerning; Way too many others, such as Foreign Markets hanging on every speech or blurb coming from our industrious FED.

 

More like the "QE Trampoline" and we don't want to be like the guy on "AFV" or Youtube, that flies off the launch and hits the fence or tree. 

Aug 19, 2013 12:19PM
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Yup a stray dog with what he calls Mr. Brucey on a leash....Who's the stray.??
Aug 19, 2013 1:28PM
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As you may have noticed they have been selling on any rally attempted to break even and to make things worse at 1320 hrs they called to accelerate the selling so we are dropping quickly....Too many of these bastards and low volume not a good combo....Oh well, we will see what happens a little later.
Aug 19, 2013 12:29PM
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Just look at JCP.  Yes if our economy was booming and there was loads of cheap cash in consumers hands I could maybe see it going somewhere.  But now with the headwinds and uncertainty the chance of it pulling itself up against Wall Mart, Target, and even Kohls it is just a flavor of kool aid.  I mean common sense.  If you were attempting to reinvent yourself in this climate where would you put JCP"s chances.  Right,  improbable!
Aug 19, 2013 11:22AM
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I could pretty much agree NTU...

To follow some of the "big boys" can be a waste of time and assets for a small investor.

We just don't have the inroads, available to them.

 

And if they look too cocky, or act too smug....Then I'm probably not interested.

In the case of Ackman....Case closed.

 

We looked at a few of the picks above, but never acted on any of them..

And have found parallels to some,(similar investments) and are content with what we have.

Aug 19, 2013 11:15AM
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I can best described Ackman's actions as- frustrated. While I advocate ZERO groups controlling us, there are people in some of them who see the same handwriting on the wall. Kohl's lives on Clearance Items and cyclical discount coupons. Macy's spends more on dusting shelves and gets less because only discount coupons bring sales. Wal-Mart is nothing. The era of imported crap is over, even though we have no replacement for it. JCP is a sad case. If it will survive, it will do so looking a lot more like it did in Penney's day than today or recent yesterday. Investors want relevance. Racks and shelves of way too common marked-up imported junk items doesn't get it. Want proof? I could walk into any JCP today and point out 25 items vastly cheaper at some other Big Box. When do Business Platforms get it? You stole our livelihoods and forced us to micro-budget but still bought quantity that everybody else has too and don't expect us to comparison shop and monitor sales and clearances? That's idiocy, not executive "talent".
Aug 19, 2013 7:33PM
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Oh well, shouldn't catch anyone by surprise....We told you that at 1320 hrs scumbags called to accelerate the selling and that's all she wrote....The sad thing is that it is all market manipulation, nothing  justifies these four day losing streak....Crooks have made a very nice chunk of dough these last couple of weeks while most hard working Americans have lost a very good chunk....Cheating still pays on Wall Street, do not forget that. Remain cautious tomorrow...Some folks will say, lets get in, market is cheap...It may get even cheaper...Be very careful.
Aug 19, 2013 2:30PM
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"But how do I know that the fate of his biggest positions might be in the balance? First, the ascension of Carl Icahn as a force took a dramatic turn to an even more positive level last week. Apple () soared on his Twitter comments that he has a huge stake in the company, relative to his normal positions -- not relative to the market capitalization as a whole, which is Doug Kass's complaint elsewhere in this site. The simple truth is that Carl's up big on Apple, and that's a testament to his power right now and the belief that no one has a hotter hand."

 

Proving that a hollow head with a Twitter in his hands and a 20th Century reputation as a bulldog has the ability to sway companies without the next greatest product even remotely in the works. Anyone with a brain can see Icahn pumped Apple on purpose so he could extract YOUR investment to keep his intact. The game has gotten stupid, folks.

Aug 19, 2013 11:55AM
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Ever see a  stray dog go through the neighborhood peeing on every firehydrant,  only everyones posts in this case.
Aug 19, 2013 2:34PM
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Back from the garden...

Really didn't see anything about CEO compensation in Article? But it is a good topic for discussion..

MSN, ...SHOULD DO a comprehensive, well written article as such, but please NO slide show.

I really doubt Cramer nor the "Street" would do such a piece, because then Cramer could get cut out of the Loop on some of his interviews....Foxes and Chicken Coops.....Den of Thieves.

 

As a private Company, very hard to get a clue at HOW MUCH compensation the CEO, President and/or Owner makes....Couldn't really pin it down with wife's Small Company, except via tax filings.

And as any might know, that is not too accurate..

 

Even as a shareholder, and voting your rights along with thousands of others; It was difficult at best to control Comps for the top guy/gal...

Different comps and perks just increased every year, period.

Nothing mattered as far as CPI or Revenue and Earnings...It just went up..

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