J.C. Penney Company, Inc. (NYSE: JCP) reported a steep drop in its fourth-quarter net income yesterday, citing weaker consumer spending. The middle-market retailer was forced to increase its promotional levels and in-season clearance activities to retain revenues, but profits dropped on the lower margins. The company also projected first-quarter and fiscal-year earnings largely below analyst expectations. Luckily, the news came as little surprise to shareholders who were expecting heavily losses, and shares actually moved up on the day. So, with such low expectations, is J.C. Penney a company worth looking at going forward?

Retailers always suffer during cycles where consumer spending falls, but they quick jump back when things return to normal. The big question becomes when a return to normalcy will occur. Consumer spending was hit thanks to declining housing prices due to the subprime collapse. Many consumers were tapping their home equity line of credit to pay off credit card bills, so when that source of funds dried up spending began to slow. Meanwhile, foreclosures, defaults, and bankruptcies are continuing to rise as consumers have no way out of debt. This has caused the securities for these instruments to also fall dramatically in value. Combined, these factors have led to the tough market and low levels of consumer spending in recent months.

Billionaire activist investor Carl Icahn quietly amassed a huge stake in J.C. Penney that was revealed earlier this month. The exact size of the stake is unknown, but sources close to the situation say it is among his top five holdings. The activist investor is known for building stakes in undervalued companies and then taking action to unlock that value through sales, spin-offs, and restructurings. It is unclear what his plans are with J.C. Penney, but he clearly believes that the stock is undervalued. This follows similar rhetoric from other activists like Bill Ackman on Target Corporation (NYSE: TGT). It appears that many now believe that the retail sector is undervalued and are buying up substantial stakes.

It is impossible to deny that many retailers like J.C. Penney are trading at a substantial discount to their past valuations. J.C. Penney is trading at just 9.39x earnings and 13x forward earnings - a cheap stock by any account. In the past, this company has traded with a ratio upwards of 20x. This means that purely on a valuation basis, the stock is 50% undervalued! Many also insist that the breakup value of the company also exceeds its market price, which makes it a fail-safe investment. In the end, these factors make JCP a stock worth watching over the next year or so!

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