Is JCPenney This Year’s Best Buy?

by Dan Burrows | March 11, 2014 2:13 pm

Is JCPenney This Year’s Best Buy?

Here’s something few would have predicted a month ago: The market is busting down the doors for JCPenney (JCP[1]).

jcpenney185 Is JCPenney This Year's Best Buy?[2]Against all odds, JCP stock has become one of the hottest trades so far this year, rallying once again Tuesday following an analyst upgrade of the deeply distressed retailer.

Of course, it’s one thing to get out of intensive care and quite another to be hale and hearty. As much as the sentiment has turned on JCP stock, this company still is plenty ill — and that makes these red-hot gains precarious at best.

JCPenney Cruising While Barely Getting By

JCPenney, still trying to right itself after the disaster that was former CEO Ron Johnson, does indeed appear to making some progress, and that has the market tripping over itself with excitement.

A little more than a month ago, JCPenney shares fell below $5 intraday trading to all-time lows. Since then, JCP stock is up 80%.

It looks like the Street is betting that JCPenney stock will be this year’s Best Buy (BBY[3]). Remember that the troubled electronic retailers was one of last year’s best stocks — gaining 236% — after being priced for death in 2012.

And that’s why anyone not willing to be active and keep a close eye on JCP stock should probably stay away. If you have neither the time, talent nor inclination to treat this one like a trader, it could come back to blow up in your face.

Just look at BBY stock this year. The stock went bonkers in 2013 on just the whiff of success in some of its turnaround plans — then started crashing again when those same plans went awry.

JCP stock could easily trace the same trajectory. After all, most turnarounds don’t turn.

Best Buy was purring along until it blew estimates over the holidays. Now BBY stock is off 35% so far this year. It’s still up 119% since the start of 2013, sure … but four months ago, its trajectory was closing in on a 300 gain%.

You don’t think anyone errantly bought in then?

Tuesday’s action was set up after a Citigroup (C[4]) analyst upgraded JCP stock to “buy” from “neutral.” After delivering same-store sales growth in the final quarter of the year, Citi analysts thinks JCPenney has enough sales momentum to continue to post positive same-store sales.

True, JCP is in the very early stages of a recovery, the analysts say, but if the retailer can just meet first-quarter and full-year forecasts, that would ease fears over its dwindling cash position — and that would drive the stock even higher.

Sure, if the company does meet or beat Street estimates, you can indeed expect more upside for JCP stock.

But if it misses? Look out below.

JCP Stock: A Disaster Waiting to Happen

Easy come, easy go. That’s the risk in betting on big-name turnarounds like JCPenney. True, the early returns indicate that the retailer will survive. Same-store sales turned positive for the first time in two years, traffic is picking up and its corporate credit outlook recently received an upgrade.

Too bad there’s a huge difference between surviving and thriving … and there are always more things that can go wrong than can go right.

If same-store sales remain soft as inventories pile up — as at least one analyst frets about — JCP could find itself in promotional margin-crushing hell for back-to-school shopping.

The truly heroic returns are made by gambling early on these high-risk plays and JCP stock has sure delivered over the last month or so. But it won’t take much bad news for the bottom to fall out on JCP stock.

And after a 80% rally, you have to be concerned about how much more upside is left in JCPenney stock getting up of the mat.

At some point, JCPenney has to turn around to the extent that it’s a relevant retail chain again. But in today’s weak environment where so much mass and middle-market retailing is struggling, that’s going to be tough to pull off.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/12/jcpenney185.jpg
  3. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  4. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C

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