J.C. Penney (NYSE: JCP) has caught the eye of billionaire activist Carl Icahn who reporedly bought up a substantial stake in the company. The Deal Journal reported that the retailer may be among Icahn’s top five holdings, meaning his stake could run into the hundreds of millions of dollars. The move follows that of other activists, like William Ackman, into retailers that have been beaten down by a slowdown in consumer spending. Shareholders seem to be mixed on the news as shares started the day higher only to drop more than five percent.

J.C. Penney shares are up over 25% off of their highs along with many other retailers that have been helped by rate cuts and a tax rebate that promises to at least temporarily boost spending. However, many still see J.C. Penney as a cheap stock at these levels. The stock has moved down 44% during the past year after same-store sales fell 7.5%, which dropped its price-to-earnings multiple to just 9.5x last-twelve-months earnings. This compares to an industry average of 14.7x, making J.C. Penney one of the cheapest in the industry.

Activist and value investors alike have been flocking to the retail sector recently amid cheap valuations. Icahn made his interest clear last month when he said that recent declines in industry shares had made them “very cheap”. Meanwhile, other activists like William Ackman have accumulated significant economic and reported stakes in Target Corporation (NYSE: TGT) and Sears Holding Corporation (NYSE: SHLD). Indeed, the multiples of these retailers continue to trail the overall market, while their real estate and credit card assets continue to draw interest.

In the end, it will be interesting to see how this story plays out. Retailers are definitely cheap, but many believe that it may be justified given the substantial problems facing the industry. Activists like Ackman have very specific reasoning behind their investments, but Icahn may face problems if he is simply purchasing because they are undervalued. The first lesson in high-return investing is to find a catalyst - otherwise, stocks can stay cheap for awhile. What this catalyst is remains to be seen, but this is definitely a stock worth watching!

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