Calling Cheap Contrarians

From downgrades from Wall Street analysts to talks about bankruptcy, JC Penny (NYSE – JCP - $10.12), has taken a beating all the way down to a 13-year low.

Yesterday more bad news contributed to nearly a 10% drop. First, Citigroup (NYSE – C) analysts lowered the price target from $11 to $7 and Goldman Sachs (NYSE – GS) stated in a research note that it expects the retailer’s sales to improve at a slower pace than originally forecast through the end of 2013. Second, there are rumors on the street that the Company is seeking to raise about $1 billion in another equity offering.

Is the beat down a red flag or a cheap buying opportunity? The retail sector in general has had a decent year, with the SPDR S&P Retail ETF (NYSE – XRT) up over 30%, but after a sluggish back to school season, analysts are calling for a slow holiday season as well. Additionally, JCP looks dismal when you consider our September formula. The DMA presents a very bearish outlook, the forward earnings per share are forecast in the red, and there has been momentum, but downward momentum.

JC Penny looks like another has been American company who dropped the ball. The stock reached an all-time high of over $81 in 2007 and the Company and the stock have been on a downward spiral since. However, a buy here could make you a lot of money if the company turns things around over the next year or so. Again, probably the best strategy is to look at some calls. For a $20 strike the prices are $9, $23, and $29 for January 2014, February 2014, and March 2014 respectively. These are really cheap prices for the potential of doubling your money.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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