Did Short Covering Boost J.C. Penney Stock Monday?

24/7 Wall St.

At the end of November, some 29% of J.C. Penney Co. Inc. (JCP) was held by short sellers. A total of 87.7 million shares were short for a stock that trades more than 48 million shares a day, for a days-to-cover ratio of 2.

Since December 2, the company’s stock is down nearly 17% through last Friday and it has jumped more than 5% in Monday trading. The next report on short interest is due tomorrow (Christmas Eve) after 4:00 p.m. ET, and it’s almost a lead-pipe cinch that short interest will have risen in J.C. Penney’s stock in the first two weeks of December.

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The reasoning is simple: the holiday selling season is almost sure to be weak and the stores that will get hit the hardest are the weak ones. And they don’t come much weaker than J.C. Penney.

Yes, the company reported a jump of 10% in November same-store sales, but that was compared to a drop of more than 30% in November 2012. Sales have been down for so long that everything at J.C. Penney looks like up.

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There has been little in the way of shopping data for the last weekend of the season so far today, but a report early Monday morning from Reuters cites retail analytics firm RetailNext saying that traffic fell 7% this past Friday and Saturday compared with last year’s last shopping weekend. No traffic, fewer sales is how the equation goes.

Two problems for J.C. Penney: first, steep discounting that started early due to competitive pressure; and second, the stores don’t sell what customers are buying -- smartphones, tablets, and other electronic gear. An analyst at Moody’s Investors Service who ran store checks in a number of cities noted that discounts at all stores were higher this past weekend than they were last year. Not a good sign for J.C. Penney -- either for revenues or margins.

The positive action in J.C. Penney stock has got to be primarily short covering, betting that the last two weeks of December won’t produce any upside surprises for J.C. Penney shares. It is pretty hard to argue with that.

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The stock traded up about 5% at $8.73 in a 52-week range of $6.24 to $23.10. Shares hit a high of $8.84 earlier in the day before pulling back.

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