On Demand

JC Penny Is Toast: Wal-Mart Wins Among Retailers

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Here is a headline that should come as no surprise to anyone: "JCPenney (JCP) Turnaround in Doubt as Sales Plummet," CNBC, November 9, 2012.

Big shock. JCPenney has been a company struggling to find direction for the past twenty years. The company is a "tweener" that had a hard enough time competing with the likes of Wal-Mart (WMT) and Target (TGT) on the low end and with Dillard's (DDS) and Macy's (M) at the mid-range price point before the internet revolution. But now that the company has to compete with established internet retailers likeAmazon.com (AMZN) and every up-and-coming online retailer as well.

To put it bluntly, JCPenny is toast. For a long-term play almost guaranteed to make money, you could consider shorting it and waiting for it to eventually go belly up. But that's not what I want to discuss today.

Instead, I want to recommend that readers pick up shares of Wal-Mart.

Consumer sentiment is improving--Reuters reports that it just hit a five-year high--yet with the dreaded fiscal cliff looming in the wake of the presidential election, I expect consumer to be looking for bargains in their Christmas shopping this year.

This is bullish for low-cost internet retailers, of course. Yet with Amazon.com and other major online players now forced to levy sales taxes, the cost differential with "bricks and mortar" retailers isn't as wide as it used to be.

And this brings me back to Wal-Mart. In addition to running the largest chain of retail stores in the world by sales, Wal-Mart is aggressively jumping into Amazon's territory with an expanded online presence. It may be years before Wal-Mart is able to effectively compete with Amazon in the online sphere, but Wal-Mart's massive physical presence does give it one unique advantage over Amazon that I expect to be significant over time: the avoidance of shipping costs. As an example, I recently dropped several hundred dollars buying my son a tree house. Wal-Mart's price was roughly equal to Amazon's, yet I was able to save nearly $300 in shipping costs due to my option of picking up the boxes at my local store (alas, it has been two weeks and I am still trying to assemble the @#$&ing thing, but that is another story for another article).

Wal-Mart trades for 13 times next year's expected earnings and yields a reasonable 2.2% in dividends. I consider this a stock that you can buy and hold for at least the next 1-5 years.

Disclosures: Sizemore Capital is long WMT.

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Visitor - michael rotkin: Charles, Great post on $JCP and $WMT. I agree 100% that Walmart is more stable, as amazon, could easliy have competition and even by myself, in a small way if I had that type of capital. Jcpenny is toast, agreed and I was just thinking about doing puts on monday? what do you think of puts at this time, till years end? thanks and I will come back and rss. here is my twitter.com/seochampion where i chat internet marketing and some stocks
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CharlesSizemore: Michael, puts are tricky because they are time sensitive. Eventually, Penney is going to zero; it doesn't mean that it happens tomorrow, though. But at the same time, right now the thing driving the market in the short term is concern over the fiscal cliff. I do very little put buying myself, but this would seem a sensible time.
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CharlesSizemore: In a good bear rout, even good names like $WMT will take a hit. I think a 15% trailing stop would be prudent. Or, simply wait a few days to see how the fiscal cliff fiasco plays out before committing actual dollars to this trade.
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KiraBrecht: Charles, given the recent stock sell-off, what if stocks go into a cyclical bear? Would you use a stop on WMT? Or, just hang on for the long-term?
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About the Author

CharlesSizemore

Charles Lewis Sizemore, CFA, founder and editor of Macro Trend Investor (formerly The Sizemore Investment Letter), is dedicated to finding superior investments backed by powerful macro trends—before you hear about them on the nightly news or read about them in the newspaper or on the Internet. He has been a frequent guest on Bloomberg TV and Fox Business News, has been quoted in Barron’s Magazine, The Wall Street Journal,and The Washington Post and is a frequent contributor to Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.

Charles is the co-author of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy (iUniverse, 2008); and worked alongside best-selling financial author and economic strategist Harry S. Dent, Jr. in creating original research on the effects of changing global demographics on asset returns and economic growth. He also serves as the Chief Investment Officer of Sizemore Capital Management LLC,  a registered investment advisor.

His academic and real-life experience has given him a unique approach to investing: combining his insights into global macro trends with in-depth investor research. And he has developed a reputation for taking complex issues, recognizing long-term investment strategies, and then finding the hidden investing opportunities that he shares with investors.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar.

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