Death of Malls: JC Penney is now a ‘penny stock’ again

From Justin Brill, Editor, Stansberry Digest:

A new milestone in the death of traditional retail…

Longtime Digest readers know we’ve been warning about the risks to traditional retailers for years. And there is perhaps no better poster child for this trend than JC Penney (JCP).

Porter and his analysts originally recommended shorting shares of this troubled retailer four years ago yesterday – in the August 14, 2013 issue of Stansberry’s Investment Advisory. (They closed the trade just a few months later for a 31% gain.) Recently, they recommended “shorting” it again – via long-dated put options – in Stansberry’s Big Trade.

The problems plaguing traditional retailers – and JC Penney, in particular – are simple. As Porter and his team reviewed in the March issue of Stansberry’s Big Trade

The U.S. is drowning in retail space… According to real estate research firm CoStar Group, U.S. retailers still need to do away with nearly a billion square feet of retail space – more than 10% of their total property – to return sales per square foot to historical levels.

The sales generated by many stores simply don’t justify the operational costs. This is especially true for retailers like JC Penney.

These department stores cannot compete in the modern retail world. Target (TGT) and Kohl’s (KSS) have superior brands. Wal-Mart (WMT) has its world-class supply chain. Consumers looking for bargains are increasingly shopping at discount retailers, such as T.J. Maxx and Ross Stores (ROST). And let’s not forget about e-commerce, which is taking market share from all the physical retailers.

In other words, too many expensive stores plus a dwindling customer base is a recipe for large losses. And that’s exactly what we continue to see…

On Friday morning, JC Penney reported a second-quarter net loss of $62 million, or $0.20 per share. Even excluding “one-time” expenses related to shuttering 138 stores, the company lost $0.09 per share. That’s nearly double the $0.05 per share loss analysts expected. Worse, the company reported same-store sales – the most widely followed metric for retailers – fell again by 1.3% in the quarter.

JCP plunged 16.6% on the news. It is now trading for less than $4 per share – deep into “penny stock” territory – for the first time ever.

Shares are down more than 60% over the past year. Stansberry’s Big Trade subscribers are up nearly 75% in less than five months so far on the recommended trade.

Uber learns a tough subprime lesson

Regular readers know we’ve also been warning about the growing bubble in subprime consumer lending.

In particular, we’ve discussed the inherent dangers of lending large amounts of money to folks who are unlikely to ever pay it back. As Porter noted in the April 28 Digest (emphasis added)…

Subprime lending is an absurd idea. It’s the process whereby someone who isn’t creditworthy is extended a loan at a price (an interest rate) that’s insanely high. For example, buying a $10,000 used car using a 72-month loan that’s charging an annual interest rate of 20%.

Most of the time in our economy, very little of this lending goes on for good reason: These are terrible loans. They have huge default rates. (Duh, the borrowers aren’t creditworthy.) And the loans themselves are too expensive to be financed.

Normally, subprime lending is a tough business. Getting 20% a year on the loan sounds good, but if your cost to finance the loan is 8% or so, your gross spread is now down to only 12%. You can count on default rates of 20%-30%, creating losses of up to 10% of the loans. So now your gross margin is just 2%. It’s not easy to run a business where so much can go wrong on such a small gross margin.

And that’s why, for most of the last 5,000 years of recorded history, subprime lending has played a tiny role in our economy. Lending money to deadbeat borrowers isn’t a good idea for either the lender or the borrower.

We suspect executives at the popular ride-sharing firm Uber would likely agree with us today. However, that apparently wasn’t always the case…

As the Wall Street Journal reported last week, Uber jumped into subprime auto lending back in 2015 in a bid to increase its pool of eligible drivers. But the move didn’t work out as planned (emphasis added)…

Uber is winding down its U.S. auto-leasing business, according to people familiar with the matter, after the ride-hailing company discovered it was losing 18 times more money per vehicle than previously thought.

The Xchange Leasing division – begun two years ago to attract drivers whose credit prevented them from getting their own cars – had been estimating relatively modest losses of $500 per vehicle on average, these people said. But managers recently informed Uber executives and board directors that the losses were actually around $9,000 per car, or at least half the sticker price of a typical leased vehicle.

Uber launched the U.S. car-leasing program in 2015… and had high hopes for it, investing some $600 million in the business, according to the people familiar with the matter. The idea was to offer leases to new drivers who otherwise may not be able to get cars because of spotty credit histories, in an attempt to maintain a healthy supply of vehicles, crucial to keeping fares and wait times low.

This is just the latest example of how central bank manipulation has warped the economy

We’ve discussed the risks to formal subprime lenders like Santander Consumer USA (SC) in autos, Navient (NAVI) in student loans, and Capital One Financial (COF) in credit cards. But the fallout could be even greater…

If the Federal Reserve’s easy money policies could entice Uber – essentially a software company that connects drivers and riders – to become a “stealth” subprime lender, how many others are still out there?

Is this the next Seabridge Gold?

One last note before we sign off for today…

If you’ve been reading for long, you’re likely familiar with the name Seabridge Gold (SA). You’ll find it at the top of the Stansberry Research Hall of Fame we publish at the bottom of every Digest.

Our colleague Steve Sjuggerud recommended the tiny gold stock back in 2005 at less than $3 per share… And folks who took his advice went on to make nearly 10 times their money over the next few years.

Well today, another Stansberry Research analyst has discovered a small gold stock with a remarkable resemblance to Seabridge 12 years ago.

He’s prepared a short presentation explaining the situation. If you’re at all interested in profiting from the gold sector this year, you owe it to yourself to take a look. Click here for the details.

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