Don't Get Caught in JCP Short Squeeze

J.C. Penney (JCP) divergence from retail stocks (XRT).

J.C. Penney’s (NYSE: JCP) shares tanked more than 17% Thursday on the company’s latest EPS report disaster. Sales at Penney’s stores and its internet shop fell by 28.4% in its latest quarter against the prior year period. The company lost $1.95 a share this past quarter on an adjusted basis, against last year’s adjusted EPS of $0.21.

However, JCP’s embattled CEO Ron Johnson stated the company would seek to “reconnect” with its old core customers. Such an effort required the new chief to swallow his pride and back off his previously determined path away from sales promotion. With JCP shares down 59%, though, from their peak last February, shareholder and likely Board pressure was building on the once heralded boss-man to do something. Had he not acted, Johnson might have gone the way of Groupon’s (Nasdaq: GRPN) Andrew Mason, who was let go yesterday after his company’s earnings disappointment (one of many for Groupon).

Last May, I suggested at Seeking Alpha that investors sell J.C. Penney, which to me seemed to be taking on too much change too soon in its effort to more closely resemble Macy’s (NYSE: M). Those who sold the stock preserved a good deal of capital or made money on the short side. Today, though, I upgraded JCP to hold from sell, basically due to Johnson’s decree to revert to tried and tested sales methods. I could not bring myself to call it a buy just yet, though, as I’m not sure JCP’s team will do enough fast enough to make a meaningful impact. Besides, it may be too late to recover much of those lost sales, though I believe it can be done.

Most importantly to traders, JCP is on the rise Friday. I think the shares could continue to get some lift after the prior day’s deep decline, given the CEO’s important announcement. Also, there’s a decent chance Johnson could still get the boot, especially after GRPN got a double-digit lift Friday on the firing of Mason. Given JCP’s divergence from the SPDR S&P Retail (NYSE: XRT), it seems to me that a great majority of the blame could be attributable to Johnson and his team’s strategic changes. Yet, short positions should be closing out now and a squeeze would support JCP shares near-term whether the company deserves it or not.

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