Talking Numbers

This retailer's 35% rally could be just the beginning

This retailer's 35% rally could be just the beginning

JC Penney is getting kicked out of the S&P 500 Index.

The 111 year-old retail institution will be leaving the index after losing half its value in the past year. Instead, it will be relegated to the S&P 400 MidCap Index, joining the likes of Green Mountain Coffee Roasters and 3D Systems. It will also be in the company of retailers like Big Lots, and Foot Locker.

While the stock is trading at a quarter of where it was in 2012, it's up 35% from its October lows. And, the stock got a big vote of confidence Monday when it was revealed CEO Mike Ullman purchased 112,000 shares – a little over $1 million worth – the week before. Ullman was the CEO famously canned two years ago by the company under pressure by then-board member Bill Ackman, the activist investor head of Pershing Square Capital Management.

(Retail: JCPenney CEO Ullman buys 112,000 shares of JCP)

Ullman was brought back in April of this year after his replacement, Ron Johnson, led the stock to a 53% fall. Since Ullman's reinstatement, shares are down an additional 41%.

"My expectations are very poor," says John Stephenson, portfolio manager at First Asset Investment Management. "I think this thing is a sell."

"What happened in the last quarter was the earnings weren't as bad as people expected," says Stephenson. "It wasn't the worst-case scenario but it still managed to lose $900 million and that's the problem."

"This is a company that has a real prospect of going bankrupt," warns Stephenson. "They've got to get share of mind with consumers, they've got to get their costs under control – their margins have been really weak compared to other retailers – and they're hemorrhaging cash. Other than a short-term trade, I see no reason to be in here… I'd be a seller.".

(Watch: Why JC Penney's $1.97 pants could spoil Christmas)

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, is not as pessimistic on JC Penney's stock.

"I actually see a turnaround on the charts" says Ross. "I've been negative on the name. But, when I see the type of technical action that we're seeing today, it tells me you want to keep your head on a swivel and keep an open mind."

For Ross, the October lows were the part of a reverse head and shoulders pattern which the stock seems to be exiting. He sees the stock now targeting an important resistance level much higher than its current price.

Is JC Penney truly a turnaround stock or are its prospects dim? Watch the video above to see the rest of Stephenson's fundamental analysis and Ross' charts on JC Penney.

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