Will J.C. Penney’s Slumping Stock Recover?

With shares of J.C. Penney (NYSE:JCP) trading around $5, 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 said Ken Hannah will depart as its chief financial officer, a move that comes as the struggling department-store retailer looks to turn around its business. Penney named former Stage Stores Inc. (NYSE:SSI) executive Edward Record as his replacement, effective March 24. Earlier this month, the company reported that it failed to meaningfully improve sales in the fourth quarter, renewing fears and sending its stock sinking.

The results raised questions about whether the company would be able to climb out of the hole caused by a failed overhaul under former CEO Ron Johnson. Hannah was brought on as finance chief in May 2012, during Johnson’s tenure. When Johnson was ousted last year, a number of executives were thought to follow, though Hannah was considered more likely to stay. However, the company has struggled to stem its sales decline and has taken to periodically releasing its sales figures and liquidity position, looking to reassure its investor base.

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 poised to continue. 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 rising 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

116.17%

66%

63%

What does this mean? This means that investors or traders are buying a significant 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

Steep

Average

April Options

Steep

Average

As of Thursday, 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 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 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

246.43%

-297.01%

-110.67%

-518.09%

Revenue Growth (Y-O-Y)

-5.06%

-11.88%

-16.4%

-28.41%

Earnings Reaction

8.38%

5.97%

-4.15%

7.37%

J.C. Penney has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings 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

-34.8%

-0.34%

-10.4%

-10.7%

-13.06%

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 said Ken Hannah will depart as its chief financial officer. 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 produced mixed feelings among investors. 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.

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