I hope you will forgive me, but I must be blunt: J C Penney Company Inc (NYSE:JCP) is a contrarian opportunity turned into a nightmare. I’m sympathetic with the argument that the JCP stock price has fallen so much that it has nowhere to go but up. Indeed, shares are down a shocking 62% year-to-date. At this rate, people can get an American retail icon at a discount.
But are they really getting a discount?
Merriam-Webster defines discount as “a reduction made from the gross amount or value of something.” In that sense, yes, JCP stock is on a discount. But the textbook definition does nothing to address the broader context. Obviously, investors invest to make money, not to lose it. As I warned earlier, don’t mess around with JCP because you might get burned.
News flash: a lot of people who didn’t listen got burned, badly.
I issued my warning a on Oct 17. At the time, the JCP stock price closed at $3.44. Inside of three weeks, shares closed at a low of $2.37, or a 31% loss. Granted, since early November, JCP has moved back up above $3. But even with a 34% gain, the retailer is still down around 8% from the publication date of my article.
The contrarians may say that JCP’s third quarter earnings report, which catalyzed the recent rally, is proof of a resurgence. Yes, we saw a positive earnings surprise, and more important, comparable sales are up 1.7%. Another boost is the fact that Q3 revenues of $2.81 billion beat Wall Street’s estimate for $2.74 billion.
I don’t want to sound cavalier, but who cares?
JCP stock and the Curse of Small Numbers
While the JCP stock is undoubtedly buoyed by the earnings beat, it hasn’t made substantive gains against its industry. For instance, department store heavyweights Macy’s Inc (NYSE:M) and Nordstrom, Inc. (NYSE:JWN) posted similar quarterly results. They too saw their share prices rise. Yet just like JCP, the charts for both Macy’s and Nordstrom are stuck in a bearish channel.
As InvestorPlace writer Tom Taulli points out, we know that J C Penney cannot afford to punch up. I’d go so far as to argue that they can’t afford to punch where they are. So the only option is to punch down.
But this has always been a tricky proposition. Taulli also notes that cost-cutting measures have their limitations. And to my point last month, J C Penney doesn’t have a standout opportunity in the low-cost sector. For instance, offseason retailer Ross Stores, Inc. (NASDAQ:ROST) is only at parity for the year.
Moving forward, the biggest challenge facing the JCP stock price is the law of small numbers. In an effort to fund its long-term turnaround strategy, management diluted the share pool. That’s okay, so long as you’re a company on the rise. When you’re a company on the decline, the law of small numbers is a curse.
As we have just recently witnessed, any bit of bad news can send the JCP stock price careening. In fact, we don’t even need bad news. If a big trader sneezes the wrong way, shares can arbitrarily collapse. The opposite is also true but, really, how many positive news items do you expect?
Even the best thesis can be derailed if the timing is off slightly. Losing 30% often triggers most people’s stop-loss orders. So should shares rise from there, you’re still out of luck.
Contrarians Need to Look Elsewhere
Still, contrarians may be holding out hope that the JCP stock price can’t fall any lower. I don’t necessarily like this reasoning unless something substantive backs the idea. After all, speculators thought that JCP couldn’t fall any further in August and it did. Also, the same thing could be said when shares gapped down in mid-May.
While JCP stock gapped-up over 15% last Friday, it hasn’t covered the losses incurred since Oct. 26. If I were speculating on J C Penney, I’d watch the 50 day moving average like a hawk. For the recovery story to have any chance, the retailer must break decisively above this average.
But to no one’s surprise, I’m not holding my breath. JCP has been an ugly investment throughout 2017. Between the end of 2013 and the closing months of 2016, J C Penney merely teased its shareholders. I don’t think you should expect anything to change in 2018 and beyond.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
