JC Penney will be around for the next economic expansion

Posted Apr 13th 2009 10:30AM by Joseph Lazzaro
Filed under: Penney (J.C.) (JCP), Stocks to Buy

A retail stock? In this economic climate? Indeed, it seems implausible, but an argument can be made -- for those investors who can tolerate moderate risk -- for JC Penney (NYSE: JCP). Here's how:

The recession and the new era of the 'frugal consumer' have really taken the wind out the retail sector's sails, but JC Penney is still standing, and if indeed the recession is beginning to bottom, institutional investors will start to position themselves in the sector in a big way. Indeed, some big investors already have, with JCP's shares already having accelerated out of a $15, 52-week low to trade around $25.

Second, look for JC Penney to capture some of the trade-down segment: these are middle-income and occasionally upper-middle-income adults who, for budget reasons, are steering clear of the designer boutiques and high-end retailers. They'll be buying only what the need, and chances are JC Penney will see some of that business. The First Call F2010 / F2011 EPS estimates for JCP are 14 cents / 70 cents.

The risks are obvious enough. If the U.S. economy's recovery is delayed by a quarter or two, that will weigh on JCP's revenue this year, and into next year. But with that as a backdrop, the risk / return still looks favorable.

Stock Analysis: JC Penney is a moderate-risk stock. Consider buying a 25% position in JCP now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your JCP position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $12.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: featured, jcp, retail sector, RetailSector