Portfolio manager Steiman on why J.C. Penney is rallying

By Markets Covestor

J.C. Penney ((JCP)) announced a deeper third-quarter loss on Wednesday yet the shares rallied about 9% on hopes the embattled retailer is beginning to successfully execute its turnaround.

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“The company is paying down debt, and the sales trends in October and November look good going forward. Those are the two main points I take away from today’s results,” said Eric Steiman, who manages the Undervalued Opportunities portfolio on Covestor.

J.C. Penney was the third-largest position in the portfolio with a roughly 10% allocation as of Wednesday’s market open. Steiman bought the stock in late September and added to the position in October.

The retailer reported a net loss of $1.94 a share, compared with a loss of 56 cents a share in the year-ago quarter. Revenue and comparable-store sales declined year-over-year, although comparable-store sales rose 0.9% for the month of October.

During Wednesday’s conference call, J.C. Penney CEO Mike Ullman said the company’s sales so far in November are consistent with the improved momentum it saw in October.

“And we continue to expect to deliver positive comps for the fourth quarter,” he added. “Our margins are not yet improving as much as sales, but we are making progress.”

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Steiman thinks signs of improvement in J.C. Penney’s recent sales were helping push the stock higher Wednesday.

Also, the company repaid $200 million from a revolving credit facility. J.C. Penney’s woes have been well-documented and the shares were down about 56% year to date before Wednesday’s rally.

“You don’t pay down debt voluntarily if you think you’re going bankrupt,” said Steiman, the portfolio manager. “The J.P. Penney bankruptcy rumors are scaring weak hands but there is some smart money buying the shares down here.”

JCP data by YCharts

Disclaimer:  The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. The investments discussed are held in client accounts as of October 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.