market folly

Bill Ackman's hedge fund just filed a 13D with the SEC regarding shares of J.C. Penney (JCP). Due to portfolio activity on September 28th, 2010 Pershing Square has disclosed a 16.5% stake in JCP with 39,075,771 shares. This is a brand new position for Ackman's hedge fund and the 13D signifies activist intent. To see the rest of Pershing's portfolio, head to our newsletter: Hedge Fund Wisdom.

Breaking down his over $900 million position, we see that Pershing Square started buying common stock around $20 in mid-August. Ackman also owns 4,156,700 shares of common stock underlying listed American-style call options purchased yesterday (October 7th). These options have strike prices ranging from $20 to $30 with two main expiration dates: May 21, 2011 and January 21, 2012. The hedge fund's largest individual option position (by underlying share count) is in the May 2011 $27 calls. They also own large positions in May 2011 calls at strike prices of $25, $26, and $28. You can view Pershing's trades in JCP here.

Pershing also has economic exposure to 602,600 notional shares of common stock under cash-settled total return swaps. These swaps have an expiration date of April 13, 2012 with a conversion/exercise price of $29.29. This exposure technically brings their ownership up to 16.8% of the company with aggregate economic exposure to 39,678,371 shares.

Pershing's filing interestingly also notes that entities tied to Vornado Realty Trust (VNO) are filing a separate 13D reporting beneficial ownership as well. Ackman believes shares of J.C. Penney are undervalued and an attractive investment. Pershing expects to engage in discussions with management alongside with Vornado in connection with their respective investments in the company.

Given Vornado's concurrent involvement and Ackman's past experience with real estate as well as his investment in fellow retailer Target (TGT), it would seem as though they are approaching their JCP investment as some sort of real estate play. You'll recall that in the past Ackman had proposed to put Target's land into a REIT and spin it off. We'll have to wait and see what Ackman's exact thesis is and we have a feeling this is the investment he'll be talking about at the Value Investing Congress next week.

In other recent activity from the hedge fund, we saw that Pershing Square received warrants from Borders Group (BGP) and also bought BP (BP) credit default swaps in the second quarter.

Taken from Google Finance, J.C. Penney is "a retailer, operating 1,108 JCPenney department stores in 49 states and Puerto Rico as of January 30, 2010. Its business consists of selling merchandise and services to consumers through its department stores and Direct (Internet/catalog) channels. JCPenney sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside JCPenney and home furnishings."

To see the rest of Ackman's investments, as well as the portfolios of other prominent hedge funds, check out our newsletter: Hedge Fund Wisdom.