Is J.C. Penney Stock A Bargain?

With shares of J.C. Penney (NYSE:JCP) trading around $12, is J.C. Penney an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

J.C. Penney is a retailer operating over a thousand department stores in just about every state in the United States and Puerto Rico. Its business consists of selling merchandise and services to consumers through its department stores and through its Internet website at jcp.com. It sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside J.C. Penney, and home furnishings. The company has not done too well in recent years but it is doing what it can to be a top provider of apparel and related products. The products J.C. Penney is able to produce and market can take the company to rising profits, but it would need to see a change of approach soon.

J.C. Penney executives are defending CEO Mike Ullman in the face of several prominent shareholders who have called for Ullman to be ousted as the retailer continues to lose money. Bill Ackman, J.C. Penney’s biggest shareholder, wrote a letter to the company’s board last week demanding that Ullman be fired, and the board met over the weekend to discuss the possibility but ultimately decided they’d stand behind Ullman, the New York Post reports.

T = Technicals on the Stock Chart are Weak

J.C. Penney stock has been struggling in recent years. The stock is now trading at lows not seen for over a decade. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, J.C. Penney is trading below its key averages which signal neutral to bearish price action in the near-term.

JCP

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of J.C. Penney options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

J.C. Penney Options

118%

96%

93%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Steep

Average

October Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on J.C. Penney’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for J.C. Penney look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-110.67%

-518.09%

16.42%

-1057.14%

Revenue Growth (Y-O-Y)

-16.40%

-28.41%

-26.57%

-22.63%

Earnings Reaction

-4.15%

7.37%

-16.96%

-4.84%

J.C. Penney has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been disappointed with J.C. Penney’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has J.C. Penney stock done relative to its peers, Macy’s (NYSE:M), Sears (NASDAQ:SHLD), Kohl’s (NYSE:KSS), and sector?

J.C. Penney

Macy’s

Sears

Kohl’s

Sector

Year-to-Date Return

-35.90%

23.40%

0.85%

18.54%

14.37%

J.C. Penney has been a poor relative performer, year-to-date.

Conclusion

J.C. Penney aims to provide the latest apparel and household products to consumers and companies across most of the United States and Puerto Rico. Shareholders are putting pressure on the board to fire the current CEO but the board has decided to vote against this. The stock has been declining in recent years and is now trading at lows not seen for over a decade. Over the last four quarters, investors in the company have been disappointed as earnings and revenue figures have been decreasing. Relative to its peers and sector, J.C. Penney has been a poor year-to-date performer. STAY AWAY from J.C. Penney stock for now.

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