Why JCPenney Company Inc. Shares Could Plunge 35%

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of J.C. Penney  (NYSE: JCP  ) fell more than 2% today after Wells Fargo downgraded the department store operator from market perform to underperform.

So what: Along with the downgrade, analyst Paul Lejuez lowered his price target to $5-$6 (from $6-$7), representing as much as 47% worth of downside to yesterday's close. So while momentum traders might be attracted to J.C. Penney's price strength in recent weeks, Lejuez's call could reflect a sense on Wall Street that investors don't fully appreciate the risks surrounding the common shares.

Now what: According to Wells, J.C. Penney's risk/reward trade-off is rather unfavorable at this point. "We are revisiting our 'Wealth Transfer' thesis, meaning that JCP's high level of debt likely leaves very little value left for equity holders, a concept which we believe is extremely important to understand for those that are intrigued by slightly better comps in Q1," said Lejuez. "Considering this dynamic, we believe the stock is overvalued at current levels and are downgrading JCP shares to Underperform from Market Perform." When you couple J.C. Penney's recent price run-up with its still highly speculative turnaround prospects, it's tough to disagree with Wells' bearishness. 

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