JCPenney Company Inc (JCP) is slated to release its first-quarter earnings report ahead of the open this Friday, and the situation appears tenuous for JCP stock. JCPenney shares have been locked in a downward spiral, and reports of unexpectedly light April sales have done little to bolster confidence.
For the quarter, Wall Street is expecting a loss of 38 cents per share, on average, with revenue up 2.1% year-over-year to $2.92 billion. EarningsWhisper.com reports that expectations may be a bit higher, with the whisper number coming in at a loss of 30 cents per share.
Additionally, guidance could be a potential bullish driver, especially with JCPenney announcing a 500-store expansion under its home appliance offerings.
That said, this optimism has worn thin for the retailer. For instance, data from Thomson First Call reveals that 16 of the 26 analysts following JCP stock rate it a hold or worse. And, while the 12-month consensus price target of $11.46 represents a 41% premium to yesterday’s close, analysts are sure to revise those targets lower if JCP doesn’t offer up a compelling reason this Friday.
Short sellers have also gotten in on the act. As of the most recent reporting period, some 84.9 million shares of JCP stock were sold short, representing more than 31% of the stock’s total float.
Typically, a sizable short position like this would lend itself toward a potential short-squeeze situation, but after JCPenney stock’s recent decline, it would take a significant rally to scare the shorts. Still, a bit of profit-taking from short sellers could provide some post-earnings support.
Click to Enlarge Options traders are just as bearish as their short-selling counterparts. In fact, the weekly May 13 series put/call open interest ratio comes in at 1.21, with puts easily outstripping calls among options set to expire at the end of this week.
Peak put open interest resides at the in-the-money $8.50 strike, totaling 11,400 contracts, while another 4,000 puts reside at the $8 and $7.50 strikes.
Overall, weekly May 13 series implies are pricing in a potential post-earnings move of about 11%. This places the upper bound at $8.86, while the lower bound lies at $7.14. A rally still leaves JCP well short of its 10- and 20-day moving averages, while a selloff would threaten to send the stock to $7 or below.
2 Trades for JCP Stock
Put Spread: On the one hand, JCP is in for more pain following Friday’s report. Cutting its workforce and opening appliance stores will do little to address the underlying problems. Those traders looking to side with the bears ahead of earnings might consider a May $7/$7.50 bear put spread. At last check, this spread was offered at 13 cents, or $13 per pair of contracts. Breakeven lies at $7.37, while a maximum profit of 37 cents, or $37 per pair of contracts, is possible if JCP closes at or below $7 when May options expire.
Call Spread: On the other hand, JCP stock is trading in oversold territory heading into Friday’s report, and much of the bad news of the past week is already priced into the shares. There is plenty of pessimism that could unwind as buying power if JCPenney can show some signs of a turnaround. Traders willing to take a chance of a post-earnings bounce might want to consider a May $8/$9 bull call spread. At last check, this spread was offered at 36 cents, or $36 per pair of contracts. Breakeven lies at $8.36, while a maximum profit of 64 cents, or $64 per pair of contracts, is possible if JCP stock closes at or above $9 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
