After the market close yesterday, Macy's (M) and JC Penney (JCP) made announcements. The headline that most news outlets took from what was said by Macy's was "Macy's to cut 2,500 jobs." The market reacted to the negative news ... M gained over 6% in aftermarket trading. JC Penney, in reference to the holiday shopping season said they were "pleased" with the results and shoppers "responded well" to their offers. The market also reacted to this positive sounding news ... JCP lost around 10%.
This is just the kind of thing that drives many observers of the stock market crazy. A well-known company announces that it is cutting back the size of its core business, a move that some would see as accepting defeat, and the stock flies! Another says it is pleased with results and the stock is trashed! The thing is, as I have said many times in these pages, which way the market chooses to see an announcement can tell you a lot about the stock's prospects. In early December I wrote a piece that was positive on M (+3.5% since) and negative on JCP (-13.6% since) and nothing that happened yesterday changes my mind.
If anything it reinforces both views.
Let me pose a question. If JC Penney had issued a press release that included news of 2,500 job cuts, do you think that stock would have jumped 6%? No, nor do I. Similarly, if Macy's had pronounced themselves pleased with holiday sales and left it at that, would M have dropped? No, probably not.
There must, one would think, be more to this than meets the eye if we dig deeper into the announcements. Unfortunately, in the case of JCP, that cannot be done. Their press release was a somewhat terse two paragraphs. According to many observers that was why the reaction was so negative; the fact that they said little must surely mean that the underlying numbers were terrible.
This smells to me of people desperately seeking to impose logic on something that defies it. Reuters reported that Stern Agee analyst Charles Grom, for example reacted by saying "If JCP had good things to say about business trends, the company would have shared more." Hmm ... I spent twenty years as an interbank forex broker and in that time learned a lot about translating the words of traders and analysts. When a trader said "...keep it quiet, but there are a lot of institutional buyers around at the moment..." that translated as "I'm long and wrong! Please spread this baseless rumor as quickly as possible!" In this case, I would translate the reaction of Mr. Grom and others as "...it doesn't matter what you say, I'm a seller."
In fact there was one other element to the release by JCP. They reaffirmed their forecast for comparable store sales to rise in December. That's right, the only other thing they said was that business was improving. If there was a market whisper that JCP would knock it out of the park in December and simply matching forecasts was a disappointment then a negative reaction to this would make sense but, as I said, this is a stock that has lost around 13% in the last month.
Macy's also talked about a previous forecast. They narrowed their guidance for the second half of 2013 to 2.8-2.9%, towards the bottom end of its previous 2.5-4% forecast. I thought that digging deeper would shed some light, but the more you know the more ridiculous this looks. Ignore the reading between the lines and the reaction for a minute and consider what was actually said.
JCP said that they were pleased with results which should be in line with a forecast increase in sales. Macy's said that they were at the bottom end of their estimates and were closing 5 stores and shedding 2,500 jobs. The reaction of the market bears repeating; JCP fell around 10% and M jumped around 6%.
This is so obviously unfair it makes you want to cry, so why do I say that I am still positive on M and negative on JCP?
Well, as I say to my children all of the time, nobody ever said life would be fair. When a market reacts, screaming at your screen that said reaction is wrong is the definition of pointless. Sentiment can move things a long way before logic takes over and yesterday's news and reaction shows that, in traders' eyes, M can do no wrong and JCP can do no right.
Eventually, actual performance will start to count more than attitude and substance will beat out style, but yesterday's events indicate that that day is still a long way off. It may be that the damage done to JC Penney during the Ron Johnson era is terminal and the stock will never recover, but I doubt it. Even so, it is hard to see value in the stock when everything the company says or does is greeted with a wave of selling. Macy's, on the other hand, can announce low end guidance and job cuts and stimulate a rally. Until that situation changes, I know where I'd rather have my money.