Is J.C. Penney Stock a Buy at These Prices?

With shares of J.C. Penney (NYSE:JCP) trading around $14, is JCP 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 U.S. state 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. J.C. Penney is able to produce and market products that can potentially take the company to rising profits, but it needs to change its approach soon.

J.C. Penney shares dropped 10.2 percent yesterday, after a report said commercial lender CIT Group (NYSE:CIT) decided to stop funding shipments to the retailer. A source cited by Reuters said CIT wanted detailed financial information from J.C. Penney before the company reports earnings on August 20. The two companies are reportedly in talks to resolve the issue.

T = Technicals on the Stock Chart are Weak

J.C. Penney stock has been struggling over the last several years. The stock is now trading at lows for the year, where it may stabilize a bit. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are 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 signals 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

70.93%

93%

90%

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

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is 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 what that means for J.C. Penney’s stock.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth. In addition, the last four quarterly earnings announcement reactions can 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, it seems the markets have expected more from 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 the overall sector?

J.C. Penney

Macy’s

Sears

Kohl’s

Sector

Year-to-Date Return

-25.20%

26.76%

13.08%

25.83%

17.72%

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

Conclusion

J.C. Penney is a retailer of trendy apparel and household items for consumers across the nation. Shares dropped recently after a report said CIT Group stopped funding shipments to J.C. Penney until it sees financial information. The stock has not done very well in recent years, and is now trading near lows for the year. Over the last four quarters, earnings and revenue figures have been declining which has not sat well with investors. Relative to its peers and sector, J.C. Penney has been a poor year-to-date performer. WAIT AND SEE what J.C. Penney does this coming quarter.

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