J.C. Penney Company (NASDAQ:JCP) may not be in the midst of the exciting activist battle it was a couple of weeks ago, but the company is the still the target of investment from some big hedge funds. A new report from Citigroup Inc. (NYSE:C) may make some investors question the failing retailer’s future.

J.C. Penney

The report, which was authored by Citigroup Inc. (NYSE:C) analyst Deborah L Weinswig, takes a look at two recent developments at J.C. Penney Company (NYSE:JCP): the company’s 10-Q filing and its Term Loan Document. There little to impress Weinswig in the documents, so she keeps J.C. Penney rated a sell with a price target of $11.

J.C. Penney problems

Weinswig reckons that J.C. Penney Company (NYSE:JCP) will under-perform in the coming year because of many trends at the company. The firm is losing its core customers after the damage done to brand identity by Bill Ackman and the general decline in J.C. Penney sales. It is also having problems with cash flow, and is becoming heavily indebted in order to solve those problems. Its cost cutting program is not doing enough to resolve cash problems.

Because she believes that J.C. Penney Company (NYSE:JCP) stocks will fall, Weinswig lists positive changes for the retailer under the heading Risks. There are several risks to the analyst’s prediction, including marketing and coupons gaining traction with customers, gross margins coming in higher because of private label sales, cost reductions coming in better than expected, and liquidity problems being alleviated with additional financing.

All of these issues are demonstrated in the  J.C. Penney Company 10-Q filing, but something more interesting might be found in the firm’s Term Loan Document. J.C. Penney Company (NYSE:JCP) is not allowed to take on more debt unless it raises less than $250 million to finance existing debt, use the rest of its $2.35B credit line, or the company issues convertible stock.

J.C. Penney mania

With all of the problems in the J.C. Penney business model, and the restrictions on the company raising more debt, an investor might be astounded that George Soros would get himself involved in the company. The reason for his involvement is simple: J.C. Penney Company (NYSE:JCP) stock doesn’t have to go up that much for him to win.

J.C. Penney is in trouble, and the company will have to pull off an incredible feat to become successful again. Investors buying in at $14 don’t need incredible, they just need stable for the price to rise.