Earnings reports to watch next week: GME, LOW, CRM >>> READ MORE

The Pessimism Surrounding J C Penney Company Inc Stock Is Intoxicating

Pros and amateurs alike are way too bearish about JCP stock's future

    View All  

To say the past few weeks have been rough ones for J C Penney Company Inc (NYSE:JCP) shareholders would be a considerable understatement. They’ve been downright miserable. The current JCP stock price is less than half of what it was at the end of July. Shares are down 30% in just the past few days after the struggling retailer dramatically lowered its third quarter earnings guidance, in turn lowering its full-year profit outlook.

Analysts as well as the financial media pounced on the news, prompting three downgrades of JCP stock since then. Headlines like “Do Not Buy the Dip in J C Penney Company Inc Stock” have quickly become the norm. Traders have made their bearish bets too, in earnest.

One can’t help but wonder, however, if the depth and scope of the outright hatred of JCPenney is ultimately a sign that it’s time to buy.

Seriously.

Unmerited Doubt

Wikipedia defines contrarianism as “an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.” It goes on to say, “A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets.” In other words, it’s darkest before dawn, even in the world of stocks. And, an interesting nuance of the premise is: The darker it seems, the nearer dawn usually is.

It’s an apropos idea to explore right now in light of the extreme hatred investors (professional and amateur alike) feel for JCPenney. With such a strong consensus that the iconic retailer is nothing more than a train wreck, a bottom for the stock may be approaching, if not already in the rearview mirror.

While it’s a qualitative idea, it’s an idea that can also be quantified to prove that traders really have assumed the worst here.

Take, for instance, the ratio of put options to call options that have traded for JCP stock of late, and how many put options (which are bets that the stock will move lower) are still held by traders. The 20-day moving average of the put/call ratio is at a multi-month high of 2.9, while the number of puts relative to calls (calls are a bullish bet) stood at a ratio of 2.7 as of Thursday. That, too, is a multi-month high.

JC Penney stock put/call ratio
Click to Enlarge

For perspective, that’s a more grim put option picture than the ones in place for Macy’s Inc (NYSE:M) and Sears Holdings Corp (NASDAQ:SHLD), two retailers the market outright despises at this time.

However, it’s not just the commitment that option traders have made to their bearish outlook for JCP stock. Professional analysts have a lower collective opinion on JCPenney than any they’ve had in the past two years.

Next Page


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/jcpenney-pessimism-is-intoxicating/.

©2017 InvestorPlace Media, LLC