Can J.C. Penney Continue to Surge Higher?

With shares of J.C. Penney (NYSE:JCP) trading around $9, 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 United States 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.

After the bell on Tuesday, J.C. Penney reported sales at stores open at least a year climbed by 10.1 percent in the month of November, marking a strong start to the holiday season for the beleaguered retailer. In the report, J.C. Penney noted that sales were improving as the result of both better merchandise options for consumers and more aggressive promotions. Investors were focusing on the potential hit to margins rather than the increase to sales as the stock was trading lower by 2.5 percent in early trading today.

T = Technicals on the Stock Chart Are Strong

J.C. Penney stock has been getting hit hard in the past couple of years. However, the stock is currently surging higher. 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 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

71.80%

3%

0%

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

Put IV Skew

Call IV Skew

December Options

Average

Average

January Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very 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 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%

-16.40%

-28.41%

Earnings Reaction

8.38%

5.97%

-4.15%

7.37%

J.C. Penney has seen improving earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased 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

-50.80%

33.67%

23.57%

26.78%

9.30%

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 reported sales at stores open at least a year climbed by 10.1 percent in the month of November, marking a strong start to the holiday season for the beleaguered retailer. The stock has struggled in recent years, but is now surging higher. Over the last four quarters, earnings are improving and revenues have been declining, which has left investors happy 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.

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