Top Ten Most Shorted Stocks: J. C. Penney
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A recent survey of the top ten most shorted stocks in the S&P 500, found J. C. Penney (NYSE: JCP) coming in at #8. The company currently has about 18.24% of its outstanding shares sold short. My contrarian nature makes me think there might be opportunity where others see problems. Let's look at J. C. Penney a little more carefully and see what's going on.
J. C. Penney
Current Price: $42.46
P/E based on '12 earnings: 35.09
Growth expected: 17.10%
I can't say I was shocked to find that J. C. Penney was in the top 10 most shorted stocks in the S&P 500. The company that used to be in every major mall, has just not been the same company for a while. However, JCP actually has a lot going for it that surprised me when I dug into the numbers. If there is a reason to consider shorting the stock, it appears to be based mainly on its price versus expected earnings.
From a technical standpoint, the company is only about 1.5% off its 52 week high. In addition, the stock has been on a good run from a low of $23.81 to current levels. The stock appears to have support at about $30. With the stock up 78% from its near term low, this has not been a good stock to short.
When it comes to earnings, JCP is expected to grow at just over 17% in the next few years. JCP has beaten estimates in all of the last 4 quarters. Not only did JCP beat earnings, but on average they beat earnings by 76%!
If I'm looking for a company to short I would look for a company with negative cash flow and no dividend. I'm not sure what the shorts are thinking here, as JCP is actually cash flow positive on average by almost $100 million per quarter. This cash flow easily covers the dividend more than twice over. The company also apparently believes its shares are somewhat undervalued, as they have repurchased shares in 2 of the last 4 quarters.
There is no doubt that JCP faces competition. The company that is taking quite a few former JCP shoppers is Kohl's (NYSE: KSS). Kohl's sells for about $49.88 which gives them a forward P/E of just 11.6. This is less than one third of the forward P/E that JCP commands. While Kohl's expected growth is lower at 13.07% their yield is slightly higher at 2%. While JCP repurchased shares 2 of the last 4 quarters, Kohl's repurchased shares in all 4 quarters this last year.
When it comes to whether you should short JCP the only decent argument for doing so would be based on valuation. With the stock selling for 35 times forward earnings, it is not cheap. With expected growth of 17% the stock is selling for about twice its growth rate. Analysts expectations for 2013 look high to me. With expectations for declining revenue, the average estimate for 2013 is for $2.05. This implies nearly 70% growth from 2012 to 2013. Even if JCP continued to beat estimates by a large margin I just don't see how a 70% increase in one year is possible. I think the shorts have a case with this stock. At fair value and a PEG of 1 the stock would only be worth about $21. That is a haircut of 50% from current prices. JCP is making some moves in the right direction, but it seems like the stock is overextended at this point.
JCP's biggest challenge might be its own reputation. It has been a long time since JCP was a destination place to shop. With discount clothing stores like Ross and Marshalls, as well as higher end competitors like Kohl's, JCP will have a tough time convincing shoppers to change. I'm placing a red thumbs-down on CAPSCall for JCP. Let me know what you think in the comments section below.
The Motley Fool has no positions in the stocks mentioned above. MHenage has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.