Buying This Stock Is a Major Mistake

A glance at J.C. Penney's (NYS: JCP) chart, illustrating the stock's recent action, should lead to one reaction: Have a bunch of investors gone absolutely nuts?

J.C. Penney shares spiked last week as the retailer promised major changes to the way it runs its business. For example, management has decided to utilize a low-price strategy all the time instead of boosting prices for later markdowns. Under that new framework, promotional sales will occur less frequently because the prices will already be low.

The retailer also plans a makeover, including adding more "stores with stores." It's been implementing such store-within-store arrangements with companies like Sephora and Martha Stewart Living Omnimedia.

CEO Ron Johnson, who is perceived as a magical hire for Penney because he previously oversaw style for Apple's retail floors, vowed that Penney's profit will hold up despite the major changes planned, and he's also vowed to pull this all off without borrowing a penny.

Anybody who's thinking about buying into J.C. Penney now needs to think long and hard before pulling the trigger. The stock's horribly overvalued, floated far too high on hopes and dreams. J.C. Penney has also decided to stop reporting monthly same-store sales and offering financial guidance; reducing transparency can signal rocky times ahead.

J.C. Penney shares are trading at 24 times forward earnings, with a PEG ratio of 1.86. That's far higher than many retail rivals; Wal-Mart's (NYS: WMT) forward price-to-earnings ratio is 12, and its PEG ratio is 1.41, and Target's (NYS: TGT) also trading at 12 times forward earnings, and a very reasonable 1.01 PEG ratio.

Value-oriented investors often view Costco (NAS: COST) as an "expensive" discount retail stock, but heck, it's even trading at lower multiples than Penney. Costco's forward P/E is 19, and its PEG ratio is 1.60. Plus, Costco's actually been performing very well; unlike Penney, no turnaround's required.

J.C. Penney should be put in the same cautionary category as Sears Holdings (NAS: SHLD) . Turnarounds are possible, but they're much easier said than done. Investors should look at stocks like these with major scrutiny, and focus on buying shares of far stronger retail stocks.

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At the time thisarticle was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Wal-Mart Stores, Apple, and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Apple, Costco Wholesale, and Wal-Mart Stores. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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