Wednesday Wasn't the Best Day for Bill Ackman

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Wednesday was a big day for activist hedge fund manager Bill Ackman. Unfortunately for him, it wasn't particularly good for his portfolio.

Shares of retailer J.C. Penney (NYSE: JCP) plunged late Wednesday after The New York Post reported that CIT had stopped financing the company’s small manufacturers, while Herbalife (NYSE: HLF) surged on reports that George Soros had taken a stake.

“J.C. Penney is having credit problems”

According to The New York Post's report, CIT no longer feels comfortable extending financing to J.C. Penney’s small manufacturers. This decision was prompted by a meeting with Penney’s management -- a meeting that left CIT uneasy with J.C. Penney’s financial situation.

If that’s the case, then the 10% sell-off in J.C. Penney shares would be justified. The company’s upcoming quarter could be weak, and the retailer’s very survival could be in doubt.

The New York Post’s track record

But the J.C. Penney report remains only a rumor at this point, and The Post didn’t even name its sources. Admittedly, the paper rarely does, and has a mixed track record when it comes to stock-related rumors.

Last August, The Post said both Electronic Arts and Coinstar (now Outerwall) were “attracting private equity interest” -- both companies remain public today. Early in July, it prompted a sell-off in shares of SodaStream when it reported that the company had tried (and failed) to sell itself. That created a great buying opportunity -- SodaStream rallied over 11% on Wednesday after reporting an impressive quarter.

Yet, it hasn't been all bad. To its credit, The Post said Saks was exploring a sale back in May -- the luxury retailer was purchased on Monday.

The Herbalife battle

But what’s most interesting about the J.C. Penney rumor is that it comes on a day when Herbalife was getting squeezed higher.

Hedge fund manager Bill Ackman is involved in both J.C. Penney and Herbalife. As of its last filing, his firm Pershing Square owned roughly 40 million J.C. Penney shares, nearly 6% of the overall portfolio.

Pershing Square also has a big bet against Herbalife. It’s short 20 million shares, about 20% of the float. Despite the fact that Herbalife has more than doubled since its December low, Ackman says he still hasn't covered a single share.

The multi-level marketer moved even higher on Wednesday after CNBC reported that legendary investor George Soros had taken a big stake in the firm. Shares closed up more than 9%.

Stock manipulation?

But, according to Fox Business, Ackman is calling foul. His legal representatives have contacted the SEC, alleging that Soros’ fund could be engaged in stock manipulation.

Soros’ stake represents less than 5% of the company, so legally, he did not need to disclose it. However, Ackman’s representatives believe that the Soros buy was done in concert with a large group of investors.

Also of note is CNBC’s interview with Bob Chapman. He’s been a harsh critic of Ackman for months, and his fund has been in and out of Herbalife stock since December.

In an interview on CNBC Wednesday, he predicted that Herbalife shares would go to $300, and that the company will inevitably get bought out.

Next up: Air Products

But Ackman hasn't lost his credibility yet. Shares of Air Products & Chemicals (NYSE: APD) jumped nearly 3% after he announced that the company was his next target.

Contrary to another New York Post rumor (claiming he was struggling to raise the money), Ackman bought up 9.8% of Air Products, stopping just short of the 10% threshold that would trigger the board’s recently adopted poison pill.

In this case, investors might be looking at some of his more recent successes. Although J.C. Penney and Herbalife grab the headlines, they make up a relatively small percentage of Pershing Square’s portfolio.

Half of Pershing Square’s capital is tied up in Canadian Pacific and Procter & Gamble -- both of which have been big winners for Ackman. Shares of the former are up about 70% since Ackman won a proxy contest for control of the company; shares of the latter are up more than 30% since Pershing Square started accumulating a stake.

Without knowing his plans for Air Products, investors should not blindly follow him into the position. Nevertheless, even with J.C. Penney and Herbalife, Ackman’s track record as an activist remains fairly solid.

Ackman’s positions

There’s a distinct possibility that the J.C. Penney rumor is completely bogus, and the stock is undervalued as a result. However, if it is true, investors should expect the retailer to report a disastrous quarter, and a further sell off is likely.

As for Herbalife, the stock has become completely divorced from the underlying business. With multiple hedge fund billionaires fighting over the company, playing it long or short could be a disaster.

Air Products might be another big winner for Ackman, assuming he can replicate his past successes in similarly boring companies like Canadian Pacific and Procter & Gamble. Yet, it would be better to wait for Ackman to present his case before moving in.

For the time being, investors might wish to avoid these companies entirely.

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Joe Kurtz owns shares of J.C. Penney Company. The Motley Fool has the following options: long January 2014 $50 calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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