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Making a Case for J.C. Penney

NEW YORK (TheStreet) -- J.C. Penney (JCP - Get Report) shares were left for dead by investors in September and swooned into the first three weeks of October, but they have now recovered nearly 50% from their Oct. 22 intraday low.

That recovery comes even though the retailer's third-quarter earnings report failed to meet analysts' expectations.

What's going on? First, let's talk relative value, the language I was talking before the September swoon.

The company Wednesday reported net sales of $2.78 billion for the quarter. Before its 9% pop on Wednesday's earnings release, those net sales were worth more than the value of the entire company. It was $2.88 billion at the start of trading today.

The number was reported as below expectations, but it was actually better than the previous two quarters, both of which came in at a little more than $2.6 billion.

Most retailers trade at about half their annual sales. Here's a retail stock that's trading at slightly less than one-fourth of its sales. That's what equity buyers call value. Assuming the company can hold its sales rate near here, it should be good for gains, and because we're talking Christmas, that's not a bad assumption. J.C. Penney had sales of $3.88 billion for its Christmas quarter last year.

Another reason for optimism came on the most recent conference call, where CEO Mike Ullman said the company was fixing problems caused by the RFID sensor system that was bought by former CEO Ron Johnson and had made the store a magnet for thieves.

The company is now returning to traditional tags and a standard return policy, which means gross margins should improve.

Here's another bit of good news. Malls seem to be making a short-term comeback. Macy's (M), Dillards (DDS) and Nordstrom (JWN), all of which anchor many malls, reported better-than-expected results for the most recent quarter. Kohl's (KSS) and Wal-Mart (WMT), which live outside malls, did less well.

This indication of better mall traffic is buttressed by J.C. Penney's own conference call, where Ullman said that November was looking pretty good. Like many retailers, J.C. Penney runs on a fiscal year ending in January, to cover returns on Christmas merchandise, so November is the first month of its current quarter.

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