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J.C. Penney's Doubters Should Hop on the Bandwagon and Make Money

NEW YORK (TheStreet) -- If you have not already hopped on the J.C. Penney (JCP - Get Report) bandwagon, it's not too late. After being left for dead the past couple of years, Penney is coming back. And the once-beleaguered retailer is hitting doubters right in the pockets.

The stock closed Thursday at $9.74, up 4.2%. Shares are up 4.3% so far this year. But that's only part of the story. The stock has surged almost 100% since Penney hit a 52-week low of $4.90 on Feb. 5. Shortly thereafter, I told you Penney would emerge as 2014's best-performing retailer. And I've been right.

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Don't let the 100% surge in the past six months fool, however. There's still room on this bandwagon. And if you're smart, you'll hop on now.

Penney's stock can still gain. This is because when compared to rivals Kohl's (KSS) and Macy's (M), Penney is the only one showing any real growth. Yet Kohl's and Macy's trade at higher price-to-book ratios than J.C. Penney. This makes no sense.

Consider that the average retailer trades at a price-to-book ratio of 2. Kohl's and Macy's come at 1.96 and 3.34, respectively. Even Walmart (WMT), which is growing revenue at 1%, commands a price-to-book ratio of 3.27.

Penney's, which just reported 5% year-over-year revenue growth and a narrower-than-expected loss, trades at a price-to-book of 1.04. This discount can only be attributed to the company's recent history of underperformance. Penney's not the same company, however. At some point, J.C. Penney will have to trade on par with its peers, which implies meaningful upside of at least 15% from current levels.

As Penney continues to improve, the market will have no choice but to correct its mistake.

From my vantage point, these shares should be worth between $12 and $15 in the next 12 to 18 months, based on 2015 estimates of a loss of $1.35. As evident by its positive same-store sales (for a third consecutive quarter), management is quickly closing that gap.

Consider that Kohl's just reported a 1.1% revenue decline and a 10-basis point decline in gross margin. This is the second consecutive quarter of declining comparable sales.

Macy's, meanwhile, missed earnings estimates while posting 3.2% revenue growth. But management spooked investors by cutting its comparable-store sales guidance to 1.5% to 2%. At one point, Macy's guided for a high-end range of 3%.

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