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Shengyuan Liu
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Graduating MBA student 1 year experience on trading American stocks and options 3 year experience on trading Chinese stocks CFA Level 2 candidate Have knowledge on both fundamental analysis and Technical Analysis
  • A Little Opinion About JCP 0 comments
    Nov 25, 2013 7:53 PM | about stocks: JCP, WMT, ZNGA, DWA

    JC Penny released Q3 financial report, adjusted EPS almost beat estimate. Market reacted better than it did after Q1 and Q2 (stock price opened with a 9% increase.)

    However, based on my personal opinion, JCP is still a speculative stock and should be avoided if price is over $7.

    The growing revenue is a good sign for the recovery, but it cannot be a support for the turning around for JCP's poor financial condition. Here are the reasons:

    1. Operating expenses are still high and not be controlled. The operating expenses are around 44% of total revenue for the last several seasons. Even though people think the big promotion will boost JCP released a higher revenue in annual report, but The operating income cannot be changed too much. The more JCP sold, the widen EBIT loss it will have.

    2. Based on the information from:

    https://eresearch.fidelity.com/eresearch/evaluate/fundamentals/earnings.jhtml?symbols=JCP

    The EPS estimate consensus for JCP on the fourth quarter will be -0.79. It is too high for JCP to achieve.

    3. The new CEO is not the most important factor related to turning around. In September, Ackman quit JCP and claimed that the board were too sophisticated to deal with. From my personal opinion, JCP needs efficient and strict financial management more than leadership. If JCP's cash flow from operation kept at the same level at the end of fiscal year, it may plan for borrowing or even bankruptcy protection.

    Zynga (NASDAQ:ZNGA) and Dream works (NASDAQ:DWA) fired almost half of their employees several month before. They kept strict management on expense structure control. Now, both of them earned confidence from shareholders since the latest financial report release.

    JCP may need to close unprofiting store and keep administrative expenses much lower than $992 million, in its Q3 financial report.

    Based on technical analysis, on September 26, JCP claimed that its 84 million shares public secondary offering plan. The next day, 256 million shares were traded. (6 times than 3 months average).

    During the 17- day trend when JCP decreased from 8.5 to 6.42, there were 5 times when the stock were traded over 50 million shares, 4 of 5, were over 70 million. But during the 20- day trend when JCP increased from 6.42 to 8.71 (one day before conference call), the only 2 biggest trade volume were 59.5 million shares and 57 million shares.

    The situation can be explained from both side:

    a. Big shareholders are not willing to sell it, other shareholders have to buy with higher and higher price. (Good for shareholders)

    b. No big shareholders are willing to buy it. Hence, the volume cannot be big. (Bad for shareholders)

    Based on my above analysis, assumption b may take bigger probability. Hence, JCP's stock is very fragile at $9. That is why I thought $7 is a comparative safe price for shareholder to buy it. (Safe price is not guaranteed)

    Information motivated investors may like JCP, it do have potential to release good news about the future;however, if JCP failed to adjustexpense structure, it may follow old General Motor------ Debt holders lostmost of their investment, stockholders lost all the money.

    If you were betting on the market reaction after FR release with more than 5% of your assets, cut the allocation of total assets to less than 3%.

    If you did not have any position on it, you are smart. Do not react on it until a pretty clear turning around factor happen.

    If you are holding it with lose like me, hold and wait.

    If investors really want to select one large retail company, Wal- Mart is a good choice.

    Disclosure: I am long JCP.

    Additional disclosure: 50 shares @ 10.42

    Stocks: JCP, WMT, ZNGA, DWA
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