Looking to Short JCP? Try A Rival Instead, But Only For A Short Time

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This morning, JC Penney (JCP) is back in the news and, if you can get past the feeling that life without JCP in every mall is unthinkable, this latest announcement sounds like a desperate move by a desperate company. Rationalization and cost reduction are necessary at times for any company to maintain profitability, but JCP announcing the closure of 33 stores and the loss of 2,000 jobs smells more like panic than reasoned cost reduction.

Initially, market reaction to this shrinkage has been predictable. The pre-market is indicating an opening for JCP at around $6.66 as I write, a 5% drop from yesterday's close. I am not about to try and pick a bottom for JC Penney, but it does strike me that if, like me, you are still inclined to sell the stock, there isn't much meat left on the bone. If you took my advice and shorted JCP in early December when it was trading close to $10, then sit tight as there may be more gains to come, but if you are considering that play now, there may be a better opportunity elsewhere.

In that same article last month, I said that I was reserving judgment on Sears Holdings (SHLD). Since then, however, there has been very little good news from that other household name among department stores. While JCP probably accelerated and exaggerated its problems during the disastrous Ron Johnson era, they aren't alone in having them. Retail is in a state of flux, with online commerce putting enormous pressure on sales and margins for the traditional giants.

Sears, too has responded by cutting, most recently shedding over 1,600 jobs in Canada. Analysts are expecting a loss when earnings are released at the end of next month, but if you are of a mind to short a department store I wouldn't wait for that.

SHLD

If you have read this column before, the chances are that you will be aware that I am not a fan of technical analysis in many cases. Generally, however, this is when it is complicated and obscure. When proximity to an important level sticks out like a sore thumb it can be a useful thing to look at. Such is the case with SHLD. The 5 year chart above shows that we are at levels seen twice before in that period, once in the dark days of 2009 and once in January of 2012. If the level is breached there is no logical support level in sight, except the 5 year low at $28.89.

It isn't hard to see why traders will be tempted to push the stock off of that cliff sometime soon. Much of the support for SHLD comes from the fact that, as the name implies, Sears is more a real estate holding company than a retailer these days. There may be some value to the real estate, but continually losing money in the retail operation is just going to dilute the overall value of the company and it is hard for any company to shed the core business that has forever formed its identity.

Sears has already shown that it isn't afraid to reduce retail presence and could slow losses significantly. Combine that with the very real value of the real estate holdings and there is definitely a floor on SHLD. For this reason, this may be the opposite of the case I pointed out when first talking about a short squeeze on JCP. There I recommended buying the stock as that squeeze took place with a view to shorting it later.

In this case, shorting SHLD in front of next month's release looks like a decent trade, but I would see it as a way of trading into a long position in the stock. For example, you could go short at around $37.70, where the stock is trading this morning, with a target just above the 5 year low, say around $29. If SHLD gets there, then I would buy twice as much, leaving me long at around $21. If the stock should for some reason jump from here, then I wouldn't get fancy, just stop myself out at around $43 for a maximum loss of around 14%.

This morning's news about JCP is undoubtedly bad, but the downside for the stock may be somewhat limited. SHLD, on the other hand, looks vulnerable to traders pushing it below a level in the face of bad news for the industry as a whole. This may be a better option in the short term, but, for me, it would be only that...a short term trade.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Business , Stocks

Referenced Stocks: SHLD , JCP

Martin Tillier


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