3 Stocks We Like More Than J.C. Penney

J.C. Penney sure has come a long way over the past few years. Shares have more than doubled from their lows, J.C. Penney was arguably the only department-store retailer that had a decent fourth quarter, and the company continues to cut costs. Sounds like a great potential investment, right?

Wrong.

Improving operations and keeping an organization out of bankruptcy court do not necessarily make for a great stock. In fact, in a world where there are thousands of reputable public companies to choose from, it's highly likely that superior options lie elsewhere.

Malls are great places to go shopping, but they don't always offer the best investment ideas.

With this in mind, some of The Motley Fool's best and brightest put their heads together and not only share why they think J.C. Penney shares might not be the best option right now, but also offer readers alternatives to good old J.C. Penney.

Read on to learn their thoughts and to discover 3 stocks that are probably better investments, at this time, than J.C. Penney.

Daniel B. Kline (Kohl's ): While J.C. Penney lost its way, stumbled around for a while, and now appears to be at least somewhat back on track, Kohl's has stayed the course. It's not that the company has not altered its business. The chain has improved efficiencies and tweaked its operations as part of what its CEO, Kevin Mansell, calls the "Greatness Agenda," but it managed to do that without ever angering its core customers.

That gave Kohl's a bigger base to build off and, frankly, less work to do. The company had to make some changes, and it has, by planning to close 18 underperforming stores in 2016 while also testing a smaller store format, as well as a two more pilot locations for its discount concept, Off-Aisle.

So far, results have been decent, with the company growing top-line sales by 1% in 2015 and posting a same-store sales increase of 0.4% -- down from 3.7% the previous year, but still better than a loss. The company also reported a 4% increase between Thanksgiving and Christmas, which Mansell accurately described by saying in the company's Q4 earnings release that "at the most competitive time in retail, customers were choosing Kohl's."

Kohl's is by no means a perfect stock, but it's a struggling retailer that has stayed true to its most loyal customers while it makes needed changes. That gives the chain a stronger identity than J.C. Penney and a better chance at coming out the other side of the ongoing retail shakedown successfully.

It's going to be a slow process -- the company forecasts that it will see total sales in the range of 0.5% higher or lower than last year in 2016 -- but it's one the company has managed well. For investors, it's going to be a long slog, but Kohl's, unlike J.C. Penney, pays a dividend -- $0.50 per share a quarter, which is an 11% increase over its prior-year dividend -- so there's an incentive to come along for what should ultimately be a successful ride.

Demitri Kalogeropoulos (GameStop (NYSE: GME)): With its core video game disk business losing ground as gamers embrace digital downloads, specialty retailer GameStop isn't getting a lot of love on Wall Street. In fact, it was just booted from the S&P 500 index as the company's market cap has dropped to $3.4 billion, not far from J.C. Penney's $3 billion level.

The two companies managed similar growth over the past year, with comparable-store sales rising by 4.5% at Penney and by 4.3% at GameStop. Yet GameStop's $400 million of net income constituted a new high mark for the retailer, while the department-store chain is still stuck in triple-digit losses.

GME Net Income (TTM) data by YCharts

GameStop's management has demonstrated skill at pushing into new retailing categories to help transition away from reliance on the video-game market. Its cell phone services and consumer technology segments are producing significant sales and profit growth. Meanwhile, collectibles have surged into a more than $300 million business in less than a year.

These wins suggest that CEO Paul Raines and his team can hit their aggressive goal of generating at least half of GameStop's operating profit from sources other than traditional video-game sales by 2019. Meanwhile, investors might be attracted by its cheaper valuation (a forward P/E of 7, compared with Penney's 14) even as they collect one of the market's most attractive dividends.

Sean O'Reilly (Macy's (NYSE: M)): I'll be the first to laud the management team at J.C. Penney HQ in Plano, Texas. In a world that's increasingly harsh toward brick-and-mortar retailers, and increasingly hospitable toward cyber-retailers, good old J.C. Penney has managed to put on a decent showing. Not only has it more or less come back from the dead, a feat in and of itself, but it was also one of the few big-box department-store retailers this past holiday season to put decent same-store-sales figures up on the board.

However, my respect for the phenomenal job by Mike Ullman, and his recent successor, Marvin Ellison, should not be confused with an endorsement for the company's shares.

The world of retail is a competitive one. Even if J.C. Penney makes it out of the woods, as appears likely at this time, it still faces the need to slash store counts and earn, as its reward, average returns on invested capital. It is for this reason that I give my investment endorsement to J.C. Penney competitor Macy's.

In contrast with J.C. Penney, Macy's has, and continues to, generate above-average returns on invested capital and copious amounts of free cash flow, all while making omnichannel investments to take Macy's into the 21st century. Not only has Macy's been "winning" while so many others are holding on for dear life, but Wall Street also seems to be lumping it in with the rest of its peers. Macy's shares have held up rather well over the past decade, only being dragged down following bad-but-not-terrible same-store-sales results in the fall of 2015.

Today, Macy's shares trade hands for just 12.3 times trailing earnings and 10.33 times forward earnings, and they offer a very respectable 3.80% dividend yield. These valuation figures, coupled with the fact that analysts polled by S&P Capital IQ expect earnings per share to grow at 9.8% annually between now and fiscal 2021, make Macy's far more worthy of our attention than J.C. Penney despite the latter's operational improvements.

The article 3 Stocks We Like More Than J.C. Penney originally appeared on Fool.com.

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