Is J.C. Penney Undervalued?

With shares of J.C. Penney (NYSE:JCP) trading around $18, 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 1,102 department stores in 49 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 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.

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T = Technicals on the Stock Chart are Mixed

J.C. Penney stock bouncing higher after establishing lows last year not seen since the 2008 Financial Crisis. The stock looks to be headed higher but needs to break above a downtrend extending back into early last year. 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 around its untangling key averages which signal neutral 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

56.3%

36%

33%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

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

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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 = Poor 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

-5.23%

25.40%

12.81%

20.29%

14.32%

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

Conclusion

J.C. Penney provides services and apparel products to a wide range of consumers who stand ready to absorb the latest trends. The stock has not done too well lately but has managed to put together a strong bounce from last year’s lows. Over the last four quarters, earnings and revenue figures have been on the decline which has not sat too well with investors in the company. Relative to its peers and sector, J.C. Penney has been a poor performer, year-to-date. WAIT AND SEE what J.C. Penney does in coming quarters.

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