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.
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.
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.
On a scale of 1 to 5 where 1 is a strong buy and 5 is a strong sell, JCP stock presently rates a 2.95, which makes it essentially a hold. That would almost be palatable were it not for the fact that such an opinion is lower than the one the pros held in November of 2015. At least in the meantime, sales have somewhat started to grow again, and at least there’s a little profit. Analysts are still calling for some profit this year despite the lowered guidance from a few days ago.
Said in simpler terms, the pros say they liked JCP stock more two years ago than they do now, even though sales growth was anything but guaranteed then, and losses were still mounting. Indeed, the pros thought JCPenney was a better bet back in 2012 when now-former CEO Ron Johnson was well into his work that drove the company into the ground. Now sales are stable and occasionally growing, full-year profits are in the cards, and JCPenney is actually doing a few things right that it wasn’t doing before.
It’s a disparity that suggests everyone is thinking with their gut, driven by the rhetoric, rather than with their head.
Bottom Line for JCP Stock
Though the revised guidance was ugly, it was also driven by a one-off event: JCPenney took heavy markdowns in an effort to overhaul a big portion of its apparel mix. Problem is, as unmerited as the extreme pessimism may be, none of this suggests traders will come to their senses anytime soon and recognize their fears are relatively irrational.
All the same, veteran traders have seen this kind of emotionally charged action before. Quite often, once the dust settles, the market realizes it overreacted and begins to unwind their doubts — and their bearish bets — in a hurry.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.