Why JC Penney's Fall Under $5/Share Might Be Worse Than Last Time

Clearly, the market couldn’t care less about J C Penney Company Inc JCP’s Q1 earnings beat. Shares are down another 12 percent on Friday and are now down almost 20 percent in two days, pushing the stock under $5 per share for the first time since 2014.

But before JC Penney bulls point to 2014 as a guide for what could happen in the months ahead, it’s important to understand the differences between 2017 and 2014 and what it could mean for the stock if it closes Friday’s session below $5.

Retail's Fall

JC Penney may have beat on earnings, but it did little to reassure investors concerned about the battering the company is taking from online competitors like Amazon.com, Inc. AMZN. The company reported a year-over-year revenue decline of 4 percent and comparable-store sales decline of 3.5 percent. Without fundamental performance to support its share price, JC Penney shares have dipped significantly below the $5 threshold on Friday.

Sub-$5 prices are not uncharted territory for JC Penney, but its previous trip below $5 in 2014 was over in the blink of an eye. Shares briefly dipped as low as $4.90 in early 2014 before quickly bouncing and closing back above $5. Within months, the stock had made it back above $10.

Related Link: JC Penney Tops List Of Hottest Short-Selling Ideas

The possibility of a similar rebound in 2017 seems unlikely. JC Penney was trading at new all-time lows of around $4.70 in mid-day trading Friday, suggesting the stock would need a more than 6 percent bounce to close back above the $5 threshold. If it doesn't find that bounce, a major psychological support level may have been broken. Unless the company finds some way to stop the bleeding, JC Penny may have seen its last $5 close ever.

Catalysts

Many institutions and pension funds aren't allowed to hold stocks that trade below $5 per share. If JC Penney doesn’t recover, it could see an uptick in institutional selling in coming months. In addition, some brokerage firms could choose to increase margin requirements for retail traders, forcing liquidations.

Without any meaningful potential catalyst ahead in coming weeks, the best hope for a quick rebound for JC Penny longs may be a short squeeze. With the stock down 43.3 percent already this year, JC Penney shorts could choose to lock-in gains at any point. According to shortsqueeze.com, JC Penney’s short percent of float is currently an exceptionally high 37.6 percent.

At time of publication, the stock was trading at $4.63.

Joel Elconin contributed to this article.

Image Credit: By Miosotis Jade (Own work) [CC BY-SA 4.0], via Wikimedia Commons