J.C. Penney Company, Inc. (NYSE:JCP) has been fighting to reinvent itself, but with Bill Ackman completely selling off his stake last month (and eating $410 million in losses), most analysts are bearish. Bernard Sosnick at Gilford Securities thinks the potential upside outweighs the risk of buying J.C. Penney right now.

J.C. Penney

August is supposed to be a big month for J.C. Penney

“We believe J.C. Penney Company, Inc. (NYSE:JCP) is stabilizing, glimmers of a turnaround will be evident soon and the stock’s upside potential exceeds downside risk,” he writes. August is supposed to be a big month for J.C. Penney Company, Inc. (NYSE:JCP), certainly the biggest for Q3, but last year was unprofitable. The company opted not to use any promotions for Labor Day weekend, and then used clearances and free haircuts to draw people in. Traffic was high, but sales were disappointing, and the company’s stock price started to drop.

This year, they are back with more promotions, fewer clearances, and a stronger online presence. Sosnick expects performance to be hindered by slow consumer spending nationwide, but says that growth will become more apparent in the fourth quarter.

“Our expectations for 2Q/13 were too optimistic,” he says. “Even so, we are not hesitant to voice our belief that signs of a turnaround will be evident in 3Q/13 and more certainly in 4Q/13, and that we believe the EPS consensus for 2014 and 2015 is too bearish.”

He sets a price target of $20, up from $12.96 right now.

However, most people are much less optimistic. “J.C. Penney Company, Inc. (NYSE:JCP) may need to raise as much as $1 billion of new capital given we expect $1.1 billion in cash burn 1Q14-3Q14,” writes UBS analyst Michael Binetti.  “If JCP raises $1 billion through debt (risky, considering JCP’s already elevated fixed costs) at 6.5 percent, we calculate $65 million of additional interest expenses (another $0.20 dilutive to our 2014 EPS estimate of -$2.58). Alternatively, in an equity scenario, if JCP raises $1 billion at a 10 percent discount to Friday’s close (85 million shares at $11.70), it could dilute FY14E EPS by $0.63 (39 percent equity dilution).”

J.C. Penney’s turnaround strategy has a chance to succeed

Both scenarios are problematic, and Binetti says that J.C. Penney Company, Inc. (NYSE:JCP)’s attempted transformation “has proven disruptive and has yet to resonate with the price-sensitive shoppers. Further, recent executive departures and an increased cash burn rate leave us with concern as to whether J.C. Penney Company, Inc. (NYSE:JCP)’s turnaround strategy has a chance to succeed.”

Binetti sets a price target of $10, which is more in line with consensus, and says that now is the time to get out. Of course, if J.C. Penney Company, Inc. (NYSE:JCP)’s stock does continue to fall, at some point investors will have to ask themselves if they’ve reached the point where a small, likely loss is offset by the possibility of a big profit. According to Sosnick, we’re already there.