JCPenney Isn't So Bad, Yahoo More Than Alibaba? And What's Next For The Market

Includes: DIA, HTZ, JCP, SPY, YHOO
by: David Ristau

In today's article, we will provide readers with a one-stop report on yesterday's markets with our current thesis on the market, pertinent news and analysis, commodities wrap-up, and a look at what is on the schedule for tomorrow. Additionally, our report will provide you with two investing ideas for stocks that were in the news yesterday as we give our analysis on these companies. Today, we will be looking at a bullish case for JCPenney (NYSE:JCP) and bearish case for Yahoo! (NASDAQ:YHOO).

Oxen Group Market Thesis

After five days of correcting, the market finally got a day of relief. The problem for the market is that we have several factors that are holding investors hostage and unsure of the future of the market. The most immediate is the situation in Washington, DC. Investors are wondering what will happen with the debt crisis, and lawmakers are using their usual tactics to hold citizens captive. As a result, buyer interest at higher levels has lost interest. Additionally, the Fed has confused people with a lot of different versions of what is happening with taper. On one front, the body as a whole does not look ready to taper, but a lot of Fed officials have been saying they are for taper and/or are worried. All of this has created a pretty weak stock market. The upside is that these things are short-term. In reality, the government will get something done, and the Fed won't taper until December at the earliest. Therefore, we like this pullback as a nice point to enter the market at a discount.

Right now, we are positioned neutral with a good amount of cash, but we are interested in adding longs at the beginning of Q4.

Here are our current charts on the SPDR S&P 500 (NYSEARCA:SPY) and SPDR Dow Jones (NYSEARCA:DIA):

(Click to enlarge)

(Click to enlarge)

As we can see, we will still are holding the 20-day and 50-day MAs on the charts, and we are seeing some support come into the charts. The big question is do we bounce from here or move back up. Without much catalyst, we should see a fairly flat action with any pullback resting at 15000 on the Dow and 1675 then 1650 on the S&P.

Pertinent News and Analysis

Yesterday's market was moving mostly on data from jobs, movement in Washington, another large slate of Fed speeches. Additionally, we had interesting company news from Hertz (NYSE:HTZ).

Let's begin with jobs data. The major jobs report of the week was initial jobless claims, which came in at 305K. It was nearly the lowest reading in six years, and it was a win for the market for sure. Additionally, California has cleared its backlog of claims. The claims data does not show as much about job growth as it does about job loss. Growth has been harder to come by with constant Washington DC showdowns, lack of confidence, and healthcare costs, but job loss has been stemmed. Claims coming down, though, does spell some confidence for the market. At the same time, it's not really a taper issue as that is based on job growth, which still seems quite weak.

On the political front, the big news of the day was House GOP leaders laying out their demands for a debt-ceiling increase. They included a delay on the healthcare law by one year as well as construction of the Keystone XL pipeline. Further, they wanted to see more energy exploration, coal regulations brought down, and fast-tracking a tax code do over. For now, this is mostly posturing. Maybe one thing gets agreed to, but if Republicans can show that they worked on these areas for constituents … it's enough. Tuesday is pending … and for now we are still nowhere near a solution.

The Fed had several speeches yesterday, and the highlight was the stark contrast between Fed Governor Jeremy Stein's speech and Minneapolis President Kocherlakota. Stein pressed for a different approach to how to figure out when to taper. He suggested some strict way to taper that would be based on ticks down in unemployment. Kocherlakota, on the other hand, supported more stimuli due to low inflation and said that the economy was not strong enough still. For now, the body seems divided, and it is unlikely to taper without a majority support. So, while the confusion is out there. Read between the lines and see that taper is not stopping anytime soon, and that's a big win for the market.

Finally, on the company front, it was a quieter day. JCP stole most of the headlines, which we will discuss below. Yet, Hertz was in the news after the company dropped their guidance for the FY, and they saw their stock drop considerably with it. The drop seemed quite over the top. Coming into the day, had a future PE over 10.5. Now, the future PE is looking short of 9. The company is still a strong-growth name. The company dropped their FY outlook from $1.78 - $1.88 to $1.68 - $1.78. That move had shares plummeting as the company noted volumes were weaker than they had expected. Yet, this company is still a name for the future. Over the past couple years; the rental car business has consolidated considerably. There are really only three players left that own over 90% of the airport business. With that, they can offer premium pricing as well as see growth from creating very strong barriers to entry. This short-term snag could be a buying opportunity.

Buy of the Day

We want to talk about JCPenney's moves yesterday. The company got another downgrade yesterday (what's new?). Yesterday, Citi got on board with recent concerns over JCP's vendor relationships as well as what seems to be a long turnaround. Further, the company questions its capital past 2013, and noted the floor on the stock could be $1. We disagree with Citi as we see several bright spots for the company along with the after-hours news of a capital injection, which are catalysts for upside. First off, the company is dirt cheap to buy. The company is trading at 0.2 price/sales, under 1.0 price/book, and they are at 0.6 EV/sales. The company is very, very cheap.

The reason is obvious because no one wants to own them right now. Their rebound plans for their new shopping experience blew up under former CEO Ron Johnson, and the company has had to restart their turnaround. There are two things, though, that we really like about this name at these levels, and that is the key - at these levels. First off, we like the company's digital approach, which is the future. According to Alexa, JCP's website ( is the 368th most visited website in the USA. They have slipped since a big push in 2012, but the company is looking strong. The company was the number two online retailer for back-to-school shopping behind just Wal-Mart (NYSE:WMT) and above Macy's (NYSE:M). We believe that the middle-class shopper is becoming more and more a big part of the online marketplace, and JCP wants to be a part of it. Further the company is working on making it so that the online marketplace is congruent with the in-store merchandise and inventory. Here are comments from CEO Mike Ullman:

Well, obviously, dot-com's a big opportunity for us. We dropped about $0.5 billion in Internet sales last year by disconnecting the merchandize assortments from the online assortments, so the fact that they were not congruent made it very difficult for store associates to access online to get additional merchandize for their customer or to put that on order. By reconnecting and realigning the merchandize assortments, the business popped almost immediately. We expect it to get progressively better. We're encouraged by the trend and each week we're seeing more store referrals to the Internet, so that's what gives us the confidence. We most recently were just cited in a Wall Street Journal study I believe it was, we had the second best Back to School online business behind Wal-Mart that tells us we're back in the game and we expect to be in the game all the way through the rest of the year. What was the other part of your question?

Yesterday, the company noted that is trending at double digits ahead of last year, and they expect positive same-store sales year/year.

Further, we like that the company is adopting mobile POS devices to check people out wherever they are in the store. This initiative cuts down on lines as well as improves efficiencies. Further, it puts more of the staff throughout the store rather than just at the cash registers, which can help clientele.

The problem for the company, as of late, has been liquidity concerns, and the suggestion was that the company will need to raise capital by 2014. Earlier in the day, Ullman had commented that he believed the company's capital situation was good for 2013. In after hours, however, the company commenced an 84M public offering for new shares. The company is using the funds for general corporate purposes. The negative is obviously share dilution as well as the overall credibility of the company declines, but at the same time, the company now has clearly enough funding. With funding fixed and a promising turnaround story built on technology advances and a return of the middle class, we like JCP at these levels. Further, what did this share dilution due to valuations? Adding 84M shares will bring shares outstanding to just over 300M. Yet, the company has no earnings and is already at rock-bottom. We see the move as necessary to appeal to institutions, investors, and help continue their turnaround. Pleasing these parties can help them maintain a large amount of their institutions. While it's a short-term sign of weakness, it's a move that was necessary.

There are concerns here, and we understand them. They are priced into the stock, though. The turnaround has taken a long time, but the company is trying to turnaround in a very stale economy for the middle class. The company is adopting trends that we believe increase margins like online and mobile payments. Further, the company is taking on initiatives to improve in areas they can control - technology and efficiency. The lack of demand for clothing and goods at bricks n mortar has been seen by Kohls (NYSE:KSS), Target (NYSE:TGT), WMT, and others. On top of that, the company is seeing strong sales in their prime areas like back-to-school shopping.

For investors, we believe there still needs to be more data out. If Q3 and Q4 show growth that is a big win. Further, shares have a short float of 32%+. A big win in Q3, which might be brewing with the online and back-to-school numbers that are being report, could bring about a mighty short squeeze. Overall, we see a great value play here in the short-term, but we still need more support to invest for the long-term. Even if the stock can get to $15-$16 on a squeeze, it will still be very cheap. At that point, investors can reevaluate.

Sell of the Day

On the flip side, Yahoo! saw its shares break the $33 per share it was offered by Microsoft. The stock has been a GREAT turnaround story whereas JCP has been anything but that. Yet, at the same time, the valuations on YHOO suggest to us that the fun may be coming to an end. The main catalysts for Yahoo's comeback have been the IPO potential for Alibaba as well as a religious following of the company's new CEO Marissa Mayer, who to this point has added Tumblr and propped the stock up considerably.

Yet, what's so different about the actual Yahoo! business. Buying YHOO is sure a way to play Alibaba, and we get that. Yet, at some point, the Yahoo! business has to become a player again for this stock to stay elevated. Right now, price/sales has jumped to 7+, and when we take away the gains from Alibaba that will come this year, the future PE is nearly 19. YHOO has to sell ½ of its shares that it owns in Alibaba at IPO. After that, the company will have a much smaller chunk of the company (roughly 12%). While that will continue to provide some upside, focus should shift back to Yahoo's business past the Alibaba deal, and once that façade is lifted…here is what's waiting:

  • Revenues declined 1% in the last quarter that was complemented with a lowered revenue guidance
  • Display revenue was down 11%
  • Tumblr won't add significant revenue in 2013 and its monetization has not been shown to be high at all yet
  • Global page views is up but very slightly

It is a company still in transition without a product that can really renew growth. The company was down to 11% of the market share for search in July versus 13% in July 2012. The company's web portal has appealing features like Finance and Sports, but the competition in those areas is quite strong.

Overall, Alibaba is the Yahoo stock right now. When it IPOs, we get a one-time cash infusion. From there, it's back to Yahoo business, and we don't see the product that can get us excited. What we have done is priced out YHOO for five years to see what pricing makes sense for the company.

We can foresee a dip in operating income in 2014 versus 2013 with Alibaba coming off the books. From there, even if we can see a strong monetization of Tumblr and comeback in ad revenue, shares still seem overpriced. Even assuming a 15% growth rate in operating income per year will deliver a price target of around $18. We are concerned about YHOO past Alibaba. Shares should stay hot into the IPO and after. Yet, by the end of it, can Yahoo have turned around their business enough to outpace these growth levels? That's our concern. We hope we are wrong but be cautious.

Here is the price analysis:

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for YHOO: 6%






PV Factor of WACC






PV of Available Cash Flow






Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for YHOO: 3%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 20167PV Factor


PV of Residual Value


Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Step 5.

Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


Today's Outlook

For tomorrow, the market needs to see something out of Washington or it will be a rough day. It will be the weekend and then the Tuesday deadline is right around the corner. With that deadline nearing, short sellers will likely have a nice hold on the market as buyer interest could dry up. We do get Personal Income and Spending as well as Michigan Consumer Sentiment reports. If solid, they can help some, but the main focus should be on DC as well as continued taper conversation, neither of which light up buyer appetite.

Overall, we would stay cashy and cautious until the DC issue clears up. At that point, though it should be all systems go.

Stay safe out there!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.