Technical and fundamental indicators both show a short term bearish signals for J. C. Penney Company, Inc. (JCP).
JCP has been trading in the range of $15.04 – $19.63 over the past 30 days. The stock has been showing support around $13.90, resistance in the $17.60 range and it is trading below both the 50-day moving average and below the 200-day moving average. Short term momentum and RSI indicators show short term bearish movements and overbought conditions.
FUNDAMENTALS
JCP’s short term bearish technical indicators are supported by weak fundamentals, as well.
JCP reported that it widened its loss in the first quarter on a 16 percent drop in revenue. It marks the fifth-straight quarter that the company has posted large declines. JCP lost $348 million, or $1.58 per share, during the three months that ended on May 4.
That compares with a loss of $163 million, or 75 cents per share, in the year-ago period. Revenue dropped 16.4 percent to $2.63 billion. Excluding charges related to restructuring and the management transition, JCP lost $289 million, or $1.31 per share, in the quarter. The poor quarterly performance follows a year in which the company lost almost a billion dollars and saw its revenue drop 25 percent, or $4.3 billion, to $12.98 billion.
JCP’s current Price/Sales of 0.27 is above the average of its industry of 0.08. The beta of 2.07 implies higher volatility of the stock with respect to the S&P 500. The company pays no dividend.
J.C. Penney recently disclosed that it had $821 million of cash as of early May, after having drawn $850 million from its revolving credit line. This indicates that the company consumed nearly $1 billion of cash during the quarter, as it funded operating losses, paid down accounts receivable, built up spring and summer inventories, and invested in store renovations.
OPTIONS STRATEGY RECOMMENDATION
Investors should consider the following debit put spread:
Buy July 2013 16.00 Puts at $0.70 and sell the July 2013 15.0 puts at $0.40. The net debit to start is $0.30, and we recommend holding until spread price reaches $0.70.
This strategy will allow you to collect time premium for out of the money short puts and decrease the overall cost of the initial investment.
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