I originally started posting on J.C. Penney (JCP) after the stock offering in late September because I thought that at any price near the offering the stock offered an attractive if not extraordinary risk reward to invest in the company with near and intermediate liquidity needs taken off the table.
I was surprised at how one sided the sell-side commentary was, not to mention the almost daily screeds from the legions of SA short contributors and members. My bullish call on the stock proved to be a few weeks early as the stock and bonds continued to swoon until Imperial's infamous $1 price target and Marc Lasry's bullish call in the bonds turned the tide. The entire capital structure has never looked back and has been on a steady run for weeks into and through Black Friday.
There is a huge difference between when I was initially the lone bull on the stock and bonds and today - we have actual positive data. In Q3, we had the first positive comp sales numbers in two years, a significant milestone for a company that had been in a sales free fall. The company also met to exceeded earnings expectations for the first time in recent memory. Last night, we have what I have been looking for - an inflection point. November comp. store sales (which includes Black Friday) were up over 10%, beating all but the most bullish of street expectations.
I still believe that in the long term for the stock to really perform, sales must go back to around $15 billion and gross margins must return to the mid 30s+. Those numbers should get you to around $20 in value though the stock will probably wildly overshoot that targets as shorts cover and momentum bulls overly extrapolate sales results - see Best Buy (BBY) as a classic example of how this occurs.
JCP was the perfect short in October, longs left holding the bag from a massively dilutive offering, no meaningful operating data until Black Friday, and 23 of 26 analysts that cover the company according to Bloomberg with sells or holds. Now, JCP may be the perfect long. We have the sales inflection point that the sell and buy side was looking for in order to upgrade or just buy the stock. This morning, Goldman, one of the big bears on the name, whose distressed desk started the run on the stock, called the sales turn an inflection point. Wells Fargo and a few of the other perma bears are performing gyrations to say that 10% isn't really good enough, or not real, or bought from too much discounting, which is what they were saying about Q3 comp. sales until margins came out in line and proved them wrong. Almost every target price is below the current stock quote, these will have to come up as Goldman's did today. The bonds and CDS have stabilized back to stressed but not distressed yields - calming vendors and investors. There will be no meaningful earnings news until January, just the bullish comp. sales number that we just received. This new news gives me confidence that we can see the sales recapture from customers lost in the Ron Johnson purge to get back to $15 billion in top line and $1.5-2 billion in EBITDA to hit my $20+ target. I have added to my position this morning.
Additional disclosure: Positions can and do change without warning or notice.