JCPenney Rally Just a Head Fake – Don’t Buy JCP Stock

The February momentum for JCP has faded, so don't be fooled

By Jeff Reeves, Executive Editor of

JCPenney (JCP) is up more than 80% from its February lows. In fact, at one point earlier this year, JCP stock enjoyed a one-day pop of 25% on hopes that cost-cutting would succeed and that revenue declines had finally bottomed.

jcpenney jcp stockBut don’t believe it. The long-term trends still are working against JCP.

Despite JCPenney improving lately, the retail stock has simply imploded since 2011. After former Apple (AAPL) retail guru Ron Johnson made changes that scared away customers in droves, JCP has seen revenue plummet a staggering 33% since fiscal 2011!

Johnson has since been fired, but the bleeding has continued as the company continues to operate at a loss and has seen plenty of downward momentum that trumps the recent strength; JCP stock is down 65% in the past five years, 80% from JCPenney’s 2012 peak, and despite the February rally, shares are in the red since Jan. 1.

Here’s why you should avoid the stock at all costs rather than expect the momentum of a few months ago to mean anything:

JCP Still Unprofitable: Although JCPenney did post a narrower loss in Q1 of this year than last, it remains deeply unprofitable. In fact, the company isn’t expected to post a quarterly profit at any point through the end of fiscal 2015, according to Standard & Poor’s forecasts. That means the company has an infinite forward P/E ratio, since profits don’t exist — something to remember before you talk about JCP stock being a “bargain.”

Stores Still Old and Unattractive: The big problem facing JCPenney is that, like its troubled peer Sears (SHLD), the locations are largely older and unattractive mall anchors that aren’t as appealing to most consumers. Retail analyst Brian Sozzi of Belus Capital Advisors advocates a “boots on the ground” strategy where he visits actual store locations to view how items are stocked, how employees treat customers and what the general shopping experience is like … and he has long maligned JCP stock as one of retail’s worst offenders when it comes to look and feel. With no profits and no cash to spend … how can JCPenney correct this in the long term?

Broadly, Retail Sucks: As I wrote recently, retail sales rebounded in March but crumbled again in April. Those bulls expecting the warmer weather to usher in a big rebound in retail and consumer spending could be in for a lot of disappointment given the ugly April numbers and anemic GDP stats recently. Also, look at Walmart (WMT), which posted not just poor earnings but poor forward guidance as a sign of how trouble in the sector should continue.

Kudos to the traders who got in to JCP stock before this recent pop. But don’t expect the big gains of today to result in any long-term uptrend for JCPenney.

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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