JCPenney (JCP) has soared by roughly 25% today on news that the battered retailer is turning around.
But does this mean investors should buy into JCP stock?
First, the details: JCPenney surged Thursday after strong earnings and an upbeat outlook. JCP shorts, of which there are many, scurried to the exits and investors bid up shares on hopes that the worst is over and that JCPenney sales declines have bottomed out.
A number of Wall Street analysts upgraded JCP stock as a result of cost-cutting and optimism over same-store sales in 2014. For instance, Citigroup raised its target to $7.50 from $6.50 and said fears about JCPenney’s liquidity “while mathematically fascinating could be overdone.” Elsewhere, Wells Fargo upgraded the department store to “market perform” and raised ts JCP stock price range to $6 to $7 — still below current pricing after the post-earnings pop, but up considerably from $4 to $5 previously.
All this is decidedly good news for JCP stock investors. It’s not just the big price surge, but also the flood of optimism that will make it much easier to find financing and keep things running for the troubled retailer. Liquidity concerns can be driven by sentiment as much as real balance sheet woes, and having investors and Wall Street a bit more confident in JCPenney means a lot.
But … Should You Buy JCP Stock?
That said … don’t take any this optimism as an endorsement of JCPenney as an investment right now.
JCP stock remains down 65% in the last 52 weeks even after this recent run. And revenue has plummeted from over $17.7 billion in 2011 to $11.8 billion in fiscal 2013.
So let’s not set off the fireworks just yet.
In fact, the reality is that traders still are very much divided on the JCP stock, betting on sentiment and near-term charts without a lot of concern for whether the company is actually healing or not. If you’re a JCP stock holder with a long horizon, you’re soundly in the majority as day-traders with incredibly short attention spans rule the roost.
Click to Enlarge Speaking of “short” attentions, consider the short interest trends in JCP … soaring from around 36 million JCPenney shares held by the bears last summer to more than 120 million shares short in mid-February. That’s more than half of available shares for trading in a given day!
The pop today was undeniably the result of a massive short squeeze in JCPenney as the bearish investors who had piled in decided it was time to bail out.
This kind of volatility is par for the course in JCP stock, and will be for some time.
So if you feel confident you’re reading the sentiment and the charts right, feel free to grab the tiger by the tail.
But honestly, most investors shouldn’t be playing this high-risk game where fundamentals simply don’t matter as much as we think they should.
There’s Nothing Wrong With Watching
The problem most investors run into with a stock like JCPenney is that it’s so dominant in financial media, and its impossible to avoid having an opinion.
Complicating things is the long history of this iconic retailer. I mean, my first suit was a Stafford in charcoal gray from JCPenney. I have distinct memories of school shopping there, and many Americans have similar personal connections to the store.
But think of JCP stock like your favorite football team if you’re a bull, or your favorite football rival if you’re a bear. Sure, it’s satisfying to bet on the game and be right … but can’t you be entertained just watching?
There’s nothing wrong with just making some popcorn and settling in for the show.
It’s much safer to simply be a spectator with JCP stock. And while there are assuredly big gains to be had if you’re right, as shown by today’s pop, there are also big risks here too. It’s all about volatility and sentiment.
Understand this before you throw money after a JCPenney turnaround.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.