Schaeffer's Trading Floor Blog

Weekly Contrarian: Can J.C. Penney Company (JCP) Attract More Bulls?

Despite concerns on and off the charts, some analysts are changing their tune on JCP

by 4/24/2013 10:59 AM
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Since ousting CEO Ron Johnson earlier this month, the shares of J.C. Penney Company, Inc. (NYSE:JCP) have rebounded from annual-low territory, climbing 13.5% to trade in the $15.38 neighborhood. "Time to bet on Penney's comeback? Maybe," states this MarketWatch article.

But while some analysts are now waxing optimistic on the retailer -- like Gilford Securities' Bernard Sosnick -- the vast majority of analysts covering the stock still consider it a "hold" or "sell," according to the columnist. Sosnick changed his tune earlier this week, upgrading JCP to "buy" from "neutral" on the belief that recently reinstated CEO Mike Ullman "may be the beneficiary over the upcoming months of better plans for Penney than existed a year ago."

Plus, while Sosnick acknowledged that it could be hard for the department store to win back some of the core customers it lost during Johnson's reign, he thinks the damage is "reversible." In fact, Customer Growth Partners' Craig Johnson told MarketWatch that J.C. Penney foot traffic has been higher year-over-year for a full month since mid-March, which is "the most positive on-the-ground development we've seen in a while."

Nevertheless, there are still risks, according to Sosnick. Notably, majority shareholder Bill Ackman of Pershing Square Capital -- an initial advocate of Johnson's -- is a wildcard, it's difficult to estimate earnings, and the company "remains in a weakened financial condition."

Contrarian Perspective

As alluded to earlier, JCP has staged a modest rebound since hitting a 12-year low of $13.55 on April 10. However, that doesn't mean the stock is in the clear. The equity is still staring up at the $15.50-$16 neighborhood, which has halted most of JCP's rally attempts since early March. Furthermore, its 10-week moving average has descended into the region. This trendline, along with its 20-week cohort, has ushered the stock roughly 23% lower in 2013.

Despite its troubles on and off the charts, J.C. Penney option traders remain optimistic. The security's Schaeffer's put/call open interest ratio (SOIR) of 0.94 ranks in the 34th percentile of its annual range, suggesting near-term options players are more call-heavy than usual right now. What's more, the overhead May 16 and 17 strikes are collectively home to almost 69,000 calls outstanding. In the near term, this abundance of bullish bets overhead could exacerbate resistance for JCP.

Until the security can break north of multi-layered resistance, or until the retailer's fundamental trajectory becomes more clear, Gilford Securities could remain in the bullish minority among the brokerage bunch.

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