Seeking Alpha
, Optionity (1 click)
Long/short equity, value, options trading, options investing
Profile| Send Message|
( followers)  

J.C. Penney Company, Inc. (NYSE:JCP) and Best Buy Co., Inc. (NYSE:BBY) had received upgrades from analysts recently. Both companies will be analyzed fundamentally and technically. Investing strategies will also be reviewed.

J.C. Penney Company, Inc.

JCP was up 2.70% and closed at $14.82 on March 7, 2013. JCP had been trading in the range of $14.20-$39.73 in the past 52 weeks. JCP has a market cap of $3.25B with a beta of 1.86.

After multiple downgrades from various analysts since August, 2013, JCP finally had one analyst's upgrade on Thursday. On March 7, 2013, Northcoast Research upgraded JCP from sell to neutral. Analysts currently have a mean target price of $15.47 and a median target price of $15.00 for JCP. Analysts, on average, are estimating an EPS of -$0.56 with revenue of $2.87B for the current quarter ending in April, 2013. For 2014, analysts are projecting an EPS of -$1.57 with revenue of $12.57B, which is 3.20% less than the previous year.

Fundamentally, there is no major positive factor, except that JCP's P/B of 0.9 and P/S of 0.2 are below the industry averages of 2.1 and 0.4 and JCP is currently trading at $14.82, which is only slightly above its book value of $14.46. While the management continues to work on the turn-around, the outlook for JCP is still unclear.

Technically, the MACD (12, 26, 9) indicator is showing a bearish trend and the MACD difference continues to diverge. The momentum indicator, RSI (14), is indicating a strong selling momentum at 30.09. JCP is currently trading below its 200-day MA of $22.13 and 50-day MA of $19.28. The next support is $12.55, the S2 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

Until seeing signs of any fundamental improvements for JCP, the author remains on the sideline for now. Nonetheless, JCP is approaching its book value of $14.46 and any dip below that price may trigger some speculative buying. Technically, JCP may be stabilized in the short-term as RSI (14) had moved out of oversold condition and MACD difference is diverging at a slower rate.

Best Buy Co., Inc.

BBY was up 2.72% and closed at $19.26 on March 7, 2013. BBY had been trading in the range of $11.20-$27.95 in the past 52 weeks. BBY has a market cap of $6.51B and a beta of 1.41.

On March 6, 2013, Jefferies upgraded BBY from hold to buy with a price target of $24.00 (from $13.00) citing an inflection point in the turnaround. Daniel Binder stated,

"Like other retail turnarounds we have seen, we are at the point in Best Buy's turnaround story where we don't have all the information we would like to understand the reinvention of Best Buy, but nonetheless we sense an inflection point. Ultimately this is a bet that new management will cut costs, bring better processes, discipline and measurement to the business, essentially fix what it has and stabilize the business."

With this positive turnaround prediction, the analyst also gave 7 reasons to own BBY, as quoted below:

1) New capable management with expertise in turnarounds and growth businesses both on land and online;

2) Clear cost-cutting opportunities and an evolving plan to go after them;

3) Strong upside to EPS as we look to Q4 of this year and beyond;

4) Expectations have been set low for 1H on heavy investment spending, giving management more flexibility;

5) Big investments are being made to improve the multi-channel experience, which should result in share gains;

6) Potential sale of Europe and China operations could fetch $600-900 million in our estimation or 10-15% of BBY's market capitalization;

7) Shifting investor sentiment could lead to multiple expansion as management shows early signs of success. Opportunities could include a double in stock price over a few years if management's plan is well executed.

Analysts currently have a mean target price of $16.63 and a median target price of $16.50 for BBY. Analysts, on average, are estimating an EPS of $0.25 with revenue of $10.73B for the current quarter ending in April, 2013. For 2013, analysts are projecting an EPS of $2.10 with revenue of $48.42B, which is 2.40% less than the previous year.

There are a few positive factors for BBY:

  • Lower P/B and P/S of 1.8 and 0.1 (vs. the industry averages of 5.0 and 1.3)
  • Lower Forward P/E of 9.8 (vs. the S&P 500's average of 13.9)
  • BBY generates an operating cash flow of $1.42B with levered free cash flow of $949.62M
  • BBY currently offers an annual dividend yield of 3.53%

Technically, the MACD (12, 26, 9) indicator is showing a bullish trend and the MACD difference continues to diverge. RSI (14) is indicating a strong buying momentum at 75.66, where above 70 is considered as overbought. BBY is currently trading above its 50-day MA of $15.10 and 200-day MA of $16.51. The next resistance is $19.93, the R1 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

BBY's share price has been increasing since mid-January as the turn-around continues. Cost-cutting will improve the bottom line and more positive developments are expected from the new management. For bullish investors, a credit put option spread of May 18, 2013, $14/$16 put can be reviewed. Investors can also review the following ETF to gain exposure to BBY:

  • S&P Equal Weight Consumer Discretionary (NYSEARCA:RCD), 1.46% weighting
  • SPDR S&P Retail ETF (NYSEARCA:XRT), 1.28% weighting
  • MidCap Dividend Fund (NYSEARCA:DON), 0.99% weighting

Note: All prices are quoted from the closing of March 7, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: J.C. Penney And Best Buy: Two Upgrades But Only One (Best) Buy