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Retail Comeback: Will These Retail Stocks Become Turnaround Stocks in 2014?

Stocks in this article: BBY RSH ZAGG

Mary-Lynn Cesar, Kapitall: J.C. Penney rose today after a Citi analyst upgraded the stock to buy. Are there more turnaround stocks to be found in retail?

J.C. Penney (JCP) shares rose 10% this morning following a rating upgrade from Citigroup (C) that increased the stock’s price target from $8.42 to $11. Citi analyst Oliver Chen explained the decision, highlighting the retailer’s gains in comparable same-store sales during the fourth quarter as proof that a recovery was taking hold.

[Read more from Kapitall: Would a Spotify IPO Rock the Music Industry?]

This is the second time in a week that J.C. Penney’s shares have jumped a significant amount in early morning trading. Last Tuesday, warm responses to the department store’s spring campaign TV spots and a credit rating upgrade sent shares up by 9%.  

Click on the interactive chart below to see sales data over time​.

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The positive sentiment is markedly different from how the markets perceived J.C. Penney back in January. Following an after-hours announcement that the retailer would close 33 stores and lay off 2000 employees, the stock price - already near a 52-week low – fell by 0.6% to $6.97.

Investing Ideas

We wanted to see if other sales-challenged stocks were primed for a turnaround in the near future. To begin, we constructed a universe comprised of stocks belonging to the following industries: department stores, electronics stores, and specialty retail, other.

We chose these industries because big name companies have been struggling in each one: JC Penney in department stores, RadioShack in electronics, and Staples in speciality retail. All three have announced store closings this year.

Next, we narrowed down that group by screening for stocks with  falling  gross profit margins year-over-year for the last three years. Gross margin is the percentage of profit a company makes for each dollar it generates in sales, after deducting production expenses. Examples of these expenses include operating costs, payroll, and taxes.

Gross Margin = Gross Profit / Revenue

The lower the percentage, the smaller the gross profits a company retains from its revenue. When a company has falling gross margins, it indicates that the firm is having difficulty controlling its costs.

We ran this screen because it allowed us to isolate the companies, like JC Penney, that may be hiding a burgeoning recovery amid lackluster sales. We were left with three stocks on our list.

The List

Click on the interactive chart to view data over time. 

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