Has J.C. Penney Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if J.C. Penney (NYSE: JCP  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at J.C. Penney.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (3.8%) Fail
  1-Year Revenue Growth > 12% (7.3%) Fail
Margins Gross Margin > 35% 35.3% Pass
  Net Margin > 15% (2.3%) Fail
Balance Sheet Debt to Equity < 50% 78.8% Fail
  Current Ratio > 1.3 1.92 Pass
Opportunities Return on Equity > 15% (8.7%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings and a recently suspended dividend. Total score = number of passes.

Since we looked at J.C. Penney last year, the company has dropped a point. Shares have taken a 20% dive as its ambitious restructuring plans haven't yet borne fruit.

For years, J.C. Penney had a reputation for being a deep-discount department store. Rather than paying full price, shoppers could simply wait for an inevitable sale that would produce huge markdowns and big savings. Once shoppers are conditioned to respond that way, it's hard to get anyone to pay full retail for items, and J.C. Penney's bottom line suffered from that perception.

In response, J.C. Penney did an about-face with its pricing strategy. Bringing on CEO Ron Johnson from Apple's (Nasdaq: AAPL  ) highly successful Apple Store retail concept, as well as Michael Francis to take on the role of president, J.C. Penney sought to emulate the success that Target (NYSE: TGT  ) had in reinventing its brand in the 1990s.

But by doing so, the company has definitely taken on risks. J.C. Penney expects "a prolonged decline in sales" and has already turned former profits into quarterly losses. To save money, the retailer suspended its quarterly dividend. Yet given the problems that Sears Holdings (Nasdaq: SHLD  ) has had in drawing customers lately, customers seem to be moving away from the low-end department store concept entirely, either gravitating upward toward Nordstrom (NYSE: JWN  ) and other higher-end department stores or over to big-box retailers like Target.

For J.C. Penney to improve, it needs its restructuring plans to pay off, and the sooner the better. Otherwise, the retailer runs the risk of never getting much closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

J.C. Penney isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add J.C. Penney to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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