October 19, 2016

Dangers of embracing inexpensive stocks like JC Penney

From my perch JC Penney is a several-year investment and not a trade. I have made the point several times and in my more lengthy analysis on the company.

JC Penney is one of only a handful of longs for me. By my calculation it possesses good upside/downside over a one- to three-year period if it can execute its stated goals.

I have observed that the current quarter will likely be adversely impacted by unseasonably warm weather, so expectations, from my perch, are low/limited. 

However, I think we are setting up for a better fourth quarter for the company if the weather cooperates and its merchandising strategy gets customer transaction.

I hold several low priced stocks with attractive upside/downside but I don't discuss these investments in my Diary because I understand the predilection of many to fly to these stocks like bees to honey.

But higher-priced stocks can be rewarding. As an example, I have made it clear that DuPont (DD) is my favorite large-cap long. The shares have risen by nearly 50% in a relatively flat market since I purchased it. But I know for sure that subs have neglected this $68 stock (which was $52 in early 2016) in favor of JC Penney (by a multiple factor!).

Bottom Line: Subject to risk profiles, there is a role for speculative stocks in everyone's portfolio. But low-priced stocks like JCP (and others) are almost always speculative and should be weighted accordingly and relative to your appetite for risk. My advice is to always do your own homework and pay more attention to attractive priced higher-priced stocks that I (and other contributors) are long, consider buying deep in the money calls if you want the "high."

Position: Long DD, JCP (large)