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This could be the next great turnaround stock

This could be the next great turnaround stock

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Is JC Penney an American comeback story?

That's what researchers at Citi are calling it. Analyst Oliver Chen (along with Maryana Pleskanka, Nancy Hilliker, and Viven Azer) upgraded Citi's rating for JC Penney to a buy. Citi also raised the price target to $11 from an earlier $7.50.

The researchers say that the company's stock will be driven by JC Penney "going back to basics", namely with its home goods and kids products. Those two product lines were shrunk last year by management under former CEO Ron Johnson. However, Citi believes that the two lines will be about 20% to 25% of the revenue mix in 2014 and says that could add about 5% in growth to the overall company if they grow 20% compared to last year. In a note to investors, Chen and company write:

"We rate JCP Buy/High Risk. We have product conviction that JCP is back on track to restore healthy traffic with better conversion rates and model a continuation of positive comp store sales and improved margins. In our view, JCP has a number of initiatives in place including: (1) restoring private label brands & enhancing national brand assortment (2) selling through of legacy inventory & ensuring appropriate core and basics inventory levels (3) improving the home business (4) restoring initial markups necessary to support the return to promotional department store strategies (5) improving Kids and (6) strategic store closures. We expect JCP to achieve +MSD [positive mid-single digit] comps 2014E, with significant gross margin improvement, yielding ~$2bn end of year liquidity w/ trough position over $1bn (likely 3Q)."

(Read: JC Penney stock surges, Macy's hits new high)

Citi's call stands out because about half of all analysts covering the stock are neutral and another quarter of them are outright negative. And, to be sure, JC Penney's performance for the last two years has been nothing short abysmal. While this stock is up over 40% in the past month, it's still down nearly 78% since March 2012. This month's gain means that the stock is down 5% for the year; it lost one-third of its value in the month of January alone.

"Three weeks ago, it was a $5 stock," says Talking Numbers contributor Richard Ross, Global Technical Strategist from Auerbach Grayson. "So, to be here at $9 [per share] is nothing short of a miracle at this point."

Ross sees the stock's price as moving in a "falling wedge" technical pattern over the past two years, breaking below the bottom part of the wedge in September. The bottom part of the wedge is currently at $9 per share, roughly where it's trading now. Should it break significantly above that point, it could target the upside of the wedge at $11 per share, the same price target as Citi's research team.

"The high end of that falling wedge…. also happens to coincide right with the 200-day moving average at $11," says Ross. "We have a lot of momentum. I'm sure people are viewing this as potentially the next Best Buy-like resurgence in the retail space. I'm actually onboard with this call. I like it."

Ross is referring to the retailer Best Buy's 72% decline from November 2010 to the end of 2012. It executed a turnaround strategy that caused the stock to bounce an astounding 238%. With that said, Best Buy is down 35% so far in 2014 as doubt about the future of the company persist given its 2013 holiday sales numbers.

(See: CNBC's Retail coverage)

CNBC contributor Gina Sanchez, founder of Chantico Global, thinks reinstated CEO Myron "Mike" Ullman may be able to implement the right kind of changes for JC Penney to return. Sanchez notes Ullman has brought back discounts and removed underperforming brands from the company's racks.

"It's starting to work," says Sanchez. "We've seen an increase in their cash on hand to $1.5 billion; it was less than $1 billion. We've seen their quick ratio increase."

But, while JC Penney's short-term assets are projected to cover its short-term obligations in 2014, that's all predicated on management's success.

"It's a wait-and-see kind of game," says Sanchez. "Management is taking some calculated risks. And, if they don't pan out, in fact, solvency could be an issue."

JC Penney was on the brink of insolvency recently, notes Sanchez. "At one point, people did think this company was going to go bankrupt," she says. "I think that Ullman is doing the right things. He's winning back the target audience that JC Penney had through their discounting program."

Nonetheless, discounting won't be the only thing JC Penney can do to be successful, says Sanchez.

"They are making huge progress and it's a heck of a lot more solvent than it was two months ago," she says. "This is an interesting story. It's worth watching and I think it is improving."

To see the full discussion with Ross on the technicals and Sanchez on the fundamentals, watch the video above.

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