My JC Penny (JCP) and Ecopetrol (EC) holdings are paying off

by admin on April 1, 2014

In my February letter to investors, I explained why I was a believer in the JC Penny (JCP) rebound. I cited some cases throughout history where struggling companies have rebounded, making millions for smart value investors. Warren Buffett did this in the seventies with Geico. By 1974, the company was not fairing well. The government had introduced no-liability insurance in some areas, the company had extended its clientele to higher risk categories, and there were inadequate provisions made for future claims.

In 1976, GEICO announced a loss of $126 million. The company’s shares, which had traded as high as $42, were down to just under $5. The 1976 Annual General Meeting was a near riot with angry shareholders challenging management – by that point, the shares were down to about $2.

Buffett had always kept his eye on the company and took the view that despite its problems, the company’s core business was sound.

Following the annual meeting, there was a change in company management with JJ Byrnes taking over the key role. Byrnes made some drastic changes, canceling high-risk policies, laying off staff, and moving the headquarters. Through Katherine Graham, of the Washington Post, Buffett arranged to meet with Byrnes and was apparently impressed enough to buy (via Berkshire Hathaway) 500,000 shares in the company with a standing order to buy more.

The company started to improve, managing to offload much of its reinsurance risk. Salomon Brothers came to the party with an underwritten preferred stock issue (of which Berkshire took 25 percent) and Buffett interceded with the insurance regulators to ensure that GEICO kept its licenses.

Six months later, shares had risen to $8. Warren Buffett made 300% on this deal, in just a few months.

The same strategy of buying shares in companies that are temporarily struggling, but with sound core businesses, is paying off for me in 2014. Two of my biggest holdings this year, JC Penny (JCP) and Ecopetrol (EC), were up more than 18% in March, bringing my total portfolio up 5.94% for the month.

 

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