Should You Take a Chance With J.C. Penney?

With shares of J.C. Penney (NYSE:JCP) trading around $7, 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 more than 1,000 department stores in just about every state in the U.S. and Puerto Rico. Its business consists of selling merchandise and services to consumers through its department stores and website. It sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora, 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 finally had some good news to share on Wednesday. The struggling retailer released its earnings for the quarter ended February 1 and for the first time in more than two years posted a gain in profit along with a gain in same-store sales. J.C. Penney’s same-store sales rose 2 percent, the first gain since the quarter ending April 30, 2011, while its net income was $35 million, compared with a loss of $552 million in the year-ago quarter. The company’s last quarterly profit was in the quarter that ended July 2011. Revenue fell 2.6 percent to $3.78 billion. J.C. Penney’s gains may seem paltry, but many analysts, along with CEO Myron Ullman, recognize that they that indicate J.C. Penney is finally moving in the right direction.

T = Technicals on the Stock Chart Are Mixed

J.C. Penney stock has been getting hit hard in the past couple of years. However, the stock is currently surging higher and looks set to contiue. 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 between its rising key averages, which signals 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

91%

16%

13%

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

Put IV Skew

Call IV Skew

March Options

Average

Average

April Options

Average

Average

As of Thursday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral 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 Mixed 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

104.37%

246.43%

-297.01%

-110.67%

Revenue Growth (Y-O-Y)

-2.63%

-5.06%

-11.88%

-16.4%

Earnings Reaction

5.86%

8.38%

5.97%

-4.15%

J.C. Penney has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been optimistic about 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), and Kohl’s (NYSE:KSS) — and sector?

J.C. Penney

Macy’s

Sears

Kohl’s

Sector

Year-to-Date Return

-19.9%

8.22%

-13.7%

-2.22%

-5.9%

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. The company on Wednesday released its earnings for the quarter ended February 1, and for the first time in more than two years posted a gain in profit along with a gain in same-store sales. The stock has struggled in recent years but is currently surging higher. Over the last four quarters, earnings are improving and revenues have been declining, which has left investors optimistic about recent earnings announcements. Relative to its peers and sector, J.C. Penney has been a weak year-to-date performer. WAIT AND SEE what J.C. Penney does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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