Suggested Reading

Trial Attorney

Reading History

A reader asked me via email about what books to read to understand history. Please post your questions in the comments section because I most likely will lose your email–let others see your thoughts.

The book is here also read especially pages 476 to 508 (Empirical evidence of business cycles).

Then read with a critical eye: Fifty Years in Wall Street by Henry Clews (1908) and A Nation of Deadbeats by Scott Reynolds Nelson

Then The Great Bull Market, Wall Street in the 1920s by Rober Sobel

Move on to America’s Great Depression:

Then read Wall Street, A History by Charles R. Geisst.

That will get you started. Don’t forget to read more general history as well such as The Rise and Fall of the Third Reich-the mother of all bear markets for the human race. Couple that with Winston Churchill’s books on European history and WWII for another perspective.

Assessing Managements (See pages 7-9) Assessing Management

The Problem at JC Penney

Days Sales in Inventory

Inventory Turns

Here is a good article that captures the problem at JCP. Essentially a retailer owns or leases space to sell goods to customers. The wider the mark-up and/or the faster the turnover of goods, the greater the profits, return on capital, etc. JCP HAS to get customers in the door AND then get them to buy–obviously.  I don’t agree on all the comparison (Costco vs. a Dept. Store) in the graphs, but you get the picture.

(Days of Inventory = Inventory/Cost of goods x 365 days. Data courtesy of in TTM time frame.)

Any slower inventory management and Penney and Sears might as well advertise in Frommer’s Guide to museums.

Make no mistake: Sears (SHLD) and J.C. Penney (JCP) act more like museums than retailers. They’ve become simply corridors to get to the rest of the mall. The tip off: The two can’t unload their inventory. Goods move at a trickling pace and it’s killing the bottom line.

Check the length of time it takes these brick-and-mortar retailers to move their goods: Costco (COST), Wal-Mart (WMT), Target (TGT), Home Depot (HD), Sears and J.C. Penney. The chart shows how long it takes to turnover inventory. The longer the days of inventory, the longer dollars are tied up.

I think Buffett said, “Don’t look for seven foot walls to scale but three inch bumps to step over.”

Finding Quality Stocks

The Quality Dimension of Value Investing

try to couple that with a fair/good price.


2 responses to “Suggested Reading

  1. JCP is very very interesting, especially given Ackman’s involvement.

    The fact that gross margins are declining, along with revenues from the internet, suggests to me that there is something seriously wrong with the picture.

    I tried to come up with a bull case for JCP, but it’s looking tricky. It’s figures are uniformly aweful. I took a look at Sears for comparison. It’s figures are also aweful, and there is a similar pattern of decline to JCP. I think investors have to ask themselves if these types of retailers are in a secular or cyclical decline.

    The numbers do look bad if you think that their is a secular decline. I note that SHLD generated about $160m pa in free cashflow on average over the last 4 years. That’s very poor for its revenues of $43590m. JCP generated about $12985m in revenues, and its cashflows were worse.

    BUT, assuming that you’re hoping that JCP can pull itself together to be “only as bad as SHLD”, this would imply free cashflows of about $48m. What might you be willing to pay for a business which you thought to be in secular decline having free cashflows of about $48m. I would suggest that 7X would be your sell point, so you’d be willing to pay $336m tops, ignoring debt. JCP has a market cap of $3280m, implying it is considerably overvalued.

    I’ve played around with relative valuations on an EV/Sales basis, and you get either a very favourable upside or overvaluation depending on what assumptions you make. If you think EV/Sales of 1 is a fair valuation – which I think is somewhat of a stretch but not insane – then you maybe you can get 2.8X return from here. Looking at some UK broadline retailers, the median figure for EV/Sales is 0.26, which of course puts a completely different complexion on things.


    Just one other point to mention: I see that VNO (Vornado Realty Trust) has sold half its stake, and JCP’s share price dropped 11% yesterday. So a technical bounce is possible; but then again, I know nothing about technical analysis.

  2. A little more commentary from me …

    The days in inventory is interesting, but it’s difficult to decide what it “proves”.

    Over 50% of Wal-Marts revenues are from groceries, which will have a significantly higher inventory turnover in any event.

    Also, couldn’t one argue that JCP’s poor inventory turnover gives it significant room for performance, making it a greater leveraged bet for recovery?

    The point I’m making is this: we know where we are now, but it’s in knowing where we’re going that’s more important.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.