The Hated Retail Stock That Could Soar
I don’t normally chime in on well-known stocks.
As Chief Investment Strategist of Game-Changing Stocks, my goal is tell readers about “The Next Big Thing” — under-the-radar trends or companies with the potential to change the market’s outlook on an entire industry.
#-ad_banner-#If I’m right, my readers and I enjoy triple-digit gains. And not to boast, but my record of uncovering profitable opportunities is second to none.
Every once in a while though, I come across a well-known company that leaves me shaking my head — it’s just too good to pass up. A few months ago, I told my Game-Changing Stocks readers about one of these opportunities.
Today, I’d like to give you an update on it.
Retailer J.C. Penney (NYSE: JCP), announced its fourth-quarter and full 2014 results on February 26.
The good news — strong holiday sales — was already priced into the stock, but the bottom-line number disappointed investors.
It was a bit of a heartbreak: Since January 1, shares inched their way from the gutter to close above $9 on February 26. That’s a gain of more than 40% in less than two months, compared with the S&P 500’s 2.5% advance in the same time period.
Then the results were announced…
The storied retailer missed Wall Street’s expectations with a loss of $0.19 per share, including one-time items, versus an $0.11 profit in the same period a year ago.
What investors failed to realize, though, was that that number had been skewed by a $270 million non-cash tax credit.
Here’s the company’s backstory: Apple, Inc. (Nasdaq: AAPL) retail guru Ron Johnson took over J.C. Penney in 2011 with the aim of taking it upscale.
To his credit, he did well with this at Apple, turning the “uber-nerdy” prospect of a computer shop into a sleek temple of consumer cool (that has per square foot sales that will knock your socks off).
But translating these ideas to Penney landed with a thud: Penney is decidedly not an upscale chain. Johnson misread the DNA. He thought Penney customers wanted to shop in a sort of branded boutique mall, where different designers would establish little stores within the store.
See, J.C. Penney customers liked their old stores — with their coupons, frequent sales and venerable house brands — just fine. Johnson was eventually shown the door, but he managed to anger Penney’s core customers before he left, taking a huge chunk of the company’s market capitalization with him.
Today, Penney is seeking to draw back those customers and give them what they want again. New CEO Mike Ullman has made smart moves — the coupons, sales and house brands like St. John’s Bay are back. But righting the ship is taking longer than expected.
Any recovery is being partially stymied by the poor performance of many retail stocks, which, as a group, fared poorly in 2014 and continue to have trouble getting traction.
Ullman is getting the job done; he’s just not doing it fast enough. And Penney’s own forecasts for gross margin and free cash flow growth aren’t as rosy as analysts’ estimates.
So, now what?
Well, Ullman’s set to retire in August. Marvin Ellison, who led a turnaround at The Home Depot, Inc. (NYSE: HD), will take over.
Penney sees gross margin growth of 50-to-100 basis points this year (analysts had called for 150). And free cash flow will likely be flat. But comparable sales rose 4.4% both during last quarter and during the past year after the huge drop under Johnson, and the company thinks same-store sales will be up a strong 3%-to-5% this year — a little lighter than Wall Street was hoping for.
I think Wall Street may end up being pleasantly surprised with Penney. For one, the company has done a great job of doing what needs to be done to please (and woo back) its customer base.
Results are already improving.
But what I think is going to fuel a real comeback here is the outlook for oil prices. See, gas is a lot cheaper these days — and that budgetary slack really matters to families that shop at Penney.
Filling up the “Family Truckster” for half what it was costing puts real dollars back into customers’ pockets.
And that’s good news for JCP.
Also in the good news category: Wall Street didn’t gut the stock. Shares of Penney took a hard hit the day results were announced, sure, but as soon as the price fell, value investors swooped in and staunched the bleeding. The stock, which started 2015 at $6.50, managed to hold onto most of its gains for the year and closed the trading day at $8.50, only falling about 7%.
Shares have since slid a little further and now trade for around $8, but in my view the first-day reaction to the news bodes well for the stock. Wall Street clearly has hope for this brand’s future and belief in its value: Other retailers who reported the same news might easily have lost a quarter of their value.
If you’ve followed along and bought into this stock, hoping for a turnaround, don’t lose faith. Hold these shares. I think Penney is at least a $20 stock.
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