Roof Leaker To Watch: JC Penney (JCP)

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer.

Trade-Ideas LLC identified JC Penney ( JCP) as a "roof leaker" (crossing below the 200-day simple moving average on higher than normal relative volume) candidate. In addition to specific proprietary factors, Trade-Ideas identified JC Penney as such a stock due to the following factors:

  • JCP has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $112.7 million.
  • JCP has traded 26.2 million shares today.
  • JCP is trading at 7.56 times the normal volume for the stock at this time of day.
  • JCP crossed below its 200-day simple moving average.

'Roof Leaker' stocks are worth watching because trading stocks that begin to experience a breakdown can lead to potentially massive losses. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock may then be subject to emotional selling from investors that can continue to drive the stock lower. Regardless of the impetus behind the price and volume action, when a stock moves with weakness and volume it can indicate the start of a new, potentially dangerous, trend.

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More details on JCP:

J. C. Penney Company, Inc., through its subsidiary, J. C. Penney Corporation, Inc., sells merchandise through department stores in the United States. Currently there are 2 analysts that rate JC Penney a buy, 6 analysts rate it a sell, and 9 rate it a hold.

The average volume for JC Penney has been 12.8 million shares per day over the past 30 days. JC Penney has a market cap of $2.7 billion and is part of the services sector and retail industry. The stock has a beta of 1.77 and a short float of 33.6% with 6.89 days to cover. Shares are up 37% year-to-date as of the close of trading on Wednesday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates JC Penney as a sell. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, generally high debt management risk, poor profit margins and generally disappointing historical performance in the stock itself.

Highlights from the ratings report include:
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Multiline Retail industry. The net income has significantly decreased by 268.6% when compared to the same quarter one year ago, falling from $35.00 million to -$59.00 million.
  • The debt-to-equity ratio is very high at 2.83 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, JCP has a quick ratio of 0.59, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
  • The gross profit margin for PENNEY (J C) CO is currently lower than what is desirable, coming in at 33.75%. Regardless of JCP's low profit margin, it has managed to increase from the same period last year.
  • The share price of PENNEY (J C) CO has not done very well: it is down 5.39% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Multiline Retail industry and the overall market, PENNEY (J C) CO's return on equity significantly trails that of both the industry average and the S&P 500.

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