J.C. Penney's Bandwagon Will Crash

NEW YORK ( TheStreet) -- Weak same-store sales, caused by (among other things) the bad weather, has soured the mood of retail stocks. But J.C. Penney  ( JCP) continues its march upward. With shares up 3.8% in mid-day trading Tuesday, J.C. Penney's stock has surged 67% since Feb 5. This has occurred in a mere 22 trading sessions. That's legendary status.

J.C. Penney bandwagon hoppers are now hitching a ride to the holy grail of prosperity. 

Without a doubt, there's a feel-good story here. Plano, Texas-based J.C. Penney has been the retail sector's punching bag after the Ron Johnson experiment failed. But this has all of the makings of irrational exuberance.

One catalyst for Tuesday's surge came courtesy of positive remarks from a Citi report led by analyst Oliver Chen. While upgrading the stock to a "buy," Citigroup says there's potential for the stock to add an additional 30% upside.

Citigroup is late to the party. Meanwhile, investors who have always perceived this stock as cheap are soaking up the upgrade. Where was this "conviction" when the stock traded at $4.90 several weeks ago?

Unquestionably, the embattled J.C. Penney has taken some meaningful strides to stabilize its business. There are noticeable improvements both financially and operationally. I just don't believe retail investors are looking at J.C. Penney with the right lens.

First, to describe the company's fourth-quarter earnings report (released Feb. 26), let's stop using the term "better-than-expected." With revenue declining 2.6% year over year, and missing Street estimates, the more appropriate description was "less bad."

Secondly, not much was expected from the fourth-quarter report. As impressive as the $35 million earned in net income, the company benefited from a tax benefit of $270 million. This was tied to gains from J.C. Penny's pension plan.

Tired of punishing new management after Ron Johnson, the Street has always wanted to give J.C. Penney the benefit of the doubt. The slight increase in same-store-sales provided the reason. Management projects same-store sales will rise between 3% to 5% in the first quarter.

But where's the track record in this story to suggest that Penney can deliver positive store sales for all of 2014? With the stock up more than 90% already, investors are risking a lot. And even though gross margin expanded, it's also because the company has been aggressively cutting costs.

Investors are making a mistake to assume that the likes of Wal-Mart  (WMT) and Target  (TGT) will continue to struggle. Along those lines, is it just a coincidence that J.C. Penney showed "better-than-expected" numbers in the same quarter that Target experienced its data breach?

Clearly, there are other factors at play here. And not all of them are within the company's control. The good news is that the worst is over for J.C. Penney. But don't think management has outlined a strategy to support this new holy grail of prosperity. Certainly not one that merits a 90% stock surge in just 22 days.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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