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From sluggish economic growth to industry-wide price cuts, retailers are in a challenging part of the growth curve. JCPenney (JCP) has come under so much pressure that it has had to restructure its brand image. Despite the presence of shareholder activist Bill Ackman, the stock has also lost nearly half of its value over the last six months. Safer picks right now are those firms more specialized in basic merchandise, like Walmart (WMT) and Target (TGT). These two retailer have properly identified a market - low-income and middle-income individuals, respectively - and offer a diversity of products that lightly crosses over into JCPenney's jewelry and clothing market. Accordingly, I recommend shareholders open a larger stake in these companies than in JCPenney. Below, I review the fundamentals of each company.

JCPenney

The company released substantially worse results than what the market expected in the first quarter. In my belief, the business is fundamentally broken. Recent efforts to change up the store layout, remodel the logo, and introduce a new pricing plan have all across as cosmetic and desperate. If management is to turnaround the business, it must shift the attention away from speculative attempts at cajoling consumers and opt for fundamental transformations.

I have found that $70 per square foot at a 5% profit margin would justify the current valuation. By contrast, firm's like Aeropostale, Guess?, and Sam's Club generate north of ~$600 per square foot. Since JCPenney has already lost the battle in space efficiency, real value can be created through increasing sale. If the company opens more stores, it will increase brand exposure. While store count has gone up from the 2004 local trough, growth has decelerated as competition has kicked in.

As it stands currently, JCPenney is a very risky investment to make. The company has lost $1.76 per share over the last twelve trailing month. A loss of $0.17 per share is expected in the next quarter. With that said, the stock trades at 10x forward earnings, so analysts are expecting JCPenney to enter profitable territory soon.

Walmart

Walmart may not be the most undervalued company; but, in my view, it is one of the safest on the Street. With a dividend yield of 2.1%, a beta of 0.31, and a history of consistent earnings growth, there is a little downside in a Walmart investment. Furthermore, it is not likely the forecast for growth ahead is poor. Analysts actually project 8.6% annual EPS growth over the next 5 years - roughly 50 bps lower than what was realized in the past 5 years. This means 2016 EPS of around $6.86, which, at a 16x multiple, translates to a future stock value of $109.76. This is decent 10%+ annual upside when combined with the dividend yield. Not bad for a safe investment.

I also believe that the company is well positioned in both a poor economy and a strong economy. Walmart didn't exactly struggle during the recession. In fact, since 2007, the stock has taken off 61.4%. This is because real income tends to decline during a recession and, when this happens, consumers will substitute towards lower-end retailers, like Walmart. The world's leading retailer offers a variety of goods that have inelastic demand, so margins are not too vulnerable. At the same time, when the economy is doing well, real income increases and consumers buy more - benefitting all retailers.

Going forward, the company's future is in international expansion. Only ~60% of stores are located abroad, so there is a large room for penetration. With plenty of cash at hand, the firm certainly has the capital to buy related retail stores in emerging markets, switch them up into a Walmart motif, and promote the larger brand. The company recently reached not only its 52-week high recently but also its "historical high" - a valuation north of $250B. When you consider that this is less than half of Apple's (AAPL) valuation despite, in my view, a stronger and more sustainable economic moat, it becomes apparent that Walmart is a long-term buy-and-hold.

Target

Like JCPenney, Target was another activist "target" of hedge fund manager Bill Ackman. It has rebounded from the early-2009 and is now valued at a price-to-earnings ratio of 14.2. The $40.7B company generated nearly $70.8B in sales over the twelve trailing months and has consistently grown dividend yields to 2.34% currently. Earnings is forecasted to grow by 11.9% annually over the next five years - roughly double what was achieved in the past 5.

One main catalyst for the firm is REDCard and PFresh. US Consumers are cautious right now in a weak economy but are still willing to buy basic products in normal quantities. The company, however, is focused on the future and is increasing stores and expanding into Canada. Capital costs in terms of IT systems and store construction has been higher than expected, but the company has faced a pleasing amount of landlord concessions.

I believe that investors have irrationally focused on the short-term and can only see high capital costs. In the long-term, the Canada launch is well timed to exploit a full recovery and encourage shareholder entry. Over the next 2-3 years, Target is going to be rolling out 125-135 stores in Canada. This is a huge development and, if you believe the Target brand is as sound as I do, I encourage you to buy now before growth becomes more visible.

Source: As J.C. Penney Flounders, Buy Wal-Mart And Target Instead