J.C. Penney's Curious Surge

 | Feb 27, 2014 | 6:30 PM EST
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J.C. Penney (JCP) shares have risen more than 20% today. This beaten-up retailer said same-store sales grew by 2% during the fourth quarter, making for the company's first quarterly sales gain in more than three years. In addition to the comps growth, J.C. Penney reported an improving profit margin, and management told analysts to expect sales to climb in the mid-single digits.

For most retailers, such results would have no effect on the stock price -- and, in many cases, the shares would even decline. This surge illustrates the importance of price in determining value and future investment return. Price is what you pay, and value is what you get. Stated differently, an inferior company can be a better investment than a superior company wholly due to the share price.

I am obviously not saying that J.C. Penney is the ultimate bargain. But when shares were trading between $5 and $6 a share, an investor would be paying 50% of tangible book value for a retailer with $5 billion worth of property, factories, and equipment. These assets included a real estate portfolio that was likely worth far more than stated book value. The share price, then, represented nothing but negative sentiment over the stock. When the slightest dose of unexpected positive developments come through in a situation like this, the price appreciation will be anything but slight.

On the extreme opposite of J.C. Penney is Amazon (AMZN). Here, optimism rules the day, and for good reason: Amazon is very likely the Wal-Mart (WMT) of 21st-century retailing. But the price you pay to own a piece of that optimism is 600x earnings and 17x book value. A $1,000 investment into Amazon today gets you about $65 in equity and about $1.60 per year in income.

So pay very close attention to price. Sometimes an asset is so inferior that virtually any price wouldn't be suitable. But, oftentimes, all it takes is the right price to make something bad into a great investment. Best Buy (BBY) clearly proved that point last year. Perhaps it will be J.C. Penney's turn this year -- or, perhaps, it will be another lame duck that is currently being neglected.

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