Can J.C. Penney See a Turnaround?

With shares of J.C. Penney (NYSE:JCP) trading around $10, 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 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. 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.

J.C. Penney is reportedly trying to raise capital before the holiday shopping season after shares fell 15 percent on Wednesday after analysts speculated that J.C. Penney’s struggles could leave the retailer strapped for cash by October. People familiar with the matter who spoke to the Wall Street Journal said that J.C. Penney is looking into borrowing cash to get through the holidays as former CEO Ron Johnson’s efforts to turn the company around have failed. Goldman Sachs (NYSE:GS) was named as a possible investment bank the retailer may look to borrow from.

T = Technicals on the Stock Chart Are Weak

J.C. Penney stock has been part of a disastrous decline over the last several years. The stock is currently trading at lows not seen for over a decade. 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 key averages, which signal 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

117.27%

96%

95%

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

Put IV Skew

Call IV Skew

October Options

Steep

Average

November Options

Steep

Average

As of today, there is an 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 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?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-297.01%

-110.67%

-518.09%

16.42%

Revenue Growth (Y-O-Y)

-11.88%

-16.40%

-28.41%

-26.57%

Earnings Reaction

5.97%

-4.15%

7.37%

-16.96%

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

J.C. Penney

Macy’s

Sears

Kohl’s

Sector

Year-to-Date Return

-48.80%

10.56%

43.93%

21.43%

11.27%

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 is reportedly trying to raise cash as it was expected that it would run into trouble next month. The stock has struggled in recent years and is now trading at lows not seen for over a decade. Over the last four quarters, earnings and revenues have been decreasing which has produced mixed feelings among investors in the company. Relative to its peers and sector, J.C. Penney has been a weak year-to-date performer. WAIT AND SEE if J.C. Penney can produce constructive price action in the near future.

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