Surviving JCPenney in a Wal-Mart World

NEW YORK (TheStreet) -- If you're a current J.C. Penney (JCP) Investor from before the earnings release, you may be ready to break a keyboard or want to find a corner to curl up in. Don't grab your blanket just yet; the worst is likely over, or close to it.

Based on my experience with gap downs following earnings reports similar to J.C. Penney's, the odds favor yesterday or today marking the short-term low. It's not quite time to wish for a price above the closing before earnings of $33.32, but J.C. Penney does have strong support near $26. Next week will likely find bargain hunters picking up shares cheap to flip over. If Friday appears to be closing below Thursday's low, I may join with the bargain hunters for a quick hit-and-run weekend carryover.
There remains an opportunity to get long J.C. Penney today with options.

I expect bargain hunters and short sellers covering to push the price up about 50% in relation to the gap down price. Looking at the chart, I expect short-term resistance near $30. Round numbers often attract like a price magnet and repel, causing a bounce. Look for the second break above $30 as the one that "sticks."

In the meantime, count on the price continuing to fade lower absent news of a serious shift in revenue and/or earnings expectations. After a miss such as this one, it normally takes two healthy quarters to recover and win back investor confidence. If the support at $26 breaks, you may want to look at some other recent stocks after disappointing earnings.

Want to see a classic miss earnings result a few weeks after the fact? Take a look at Pandora ( P). Pandora disappointed and went from $14 down to an intraday low under $8. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Pandora is now resistance.

Pandora also took more than two months in recovery to reach the gap down price. Pandora, like J.C. Penney, will take about six months to trade again at pre-gap pricing, if the next two reports are favorably received by investors. I love listening to Pandora; but I am not ready to invest just yet.

I read Jim Cramer's "Unmitigated Disaster" article about J.C. Penney, and he brings up many points investors will want to read about. Wonder-CEO Ron Johnson, unlike other shareholders, appears to have done remarkably well from J.C. Penney. I am troubled when executives who are paid to work on behalf of shareholders take advantage of their position. I don't believe what Johnson did with his shares crossed any legal lines, but it doesn't pass the smell test either.

On Thursday, it appears we got the answer to why J.C. Penney performed so poorly. Wal-Mart ( WMT) beat estimates on the top and bottom lines. A 2.6% gain year over year in U.S. stores came from somewhere, and J.C. Penney looks to be a top donor.

Wal-Mart reported revenue of $113 billion and $1.09 net profit per share, moving the price higher 5% at the time of writing; $1.09 per share profit is 3 cents above the top of the guidance range and 11 cents higher than the same period last year.

Today demonstrates how little investors care about bribery allegations and want to focus on company performance. I am not in favor of bribing government officials around the world, but I also understand not every location is like America. Criminalizing an act committed inside another country (absent a direct impact on Americans), however well intended, is egotistical and overreaching, in my opinion.

Speaking of Wal-Mart in other countries: Wal-Mart is an excellent vehicle to gain exposure to China without as strong an accounting-risk overhead. Look to add Wal-Mart during a pullback in price.

What's the play now with J.C. Penney? There is actually opportunity to get long today with options. Take a look at the June $25 strike puts to gain exposure and mitigate risk. Trading at 90 cents, the total risk is reduced 4%, and the extra fear premium paid by buyers should decay quickly. Look to cover in about a week with a "double" profit target (40 to 45 cents each).

At the time of publication the author did not hold a position in any stock mentioned.

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