Margaret Cannella, a retail analyst at J.P. Morgan Securities and an Institutional Investor first-team member in 2000, sees JC Penney (Ba2/BBB-) as a good buy in spite of a generally grim picture for retail. Portfolio managers are wary, however. Cannella notes that the company's 7.6% of '07 went up a point to $92.50 from May 25 to June 25, while bonds of similar maturities for WalMart Stores (Aa2/AA), Target Corporation (A2/A) and Federated Department Stores (Baa1/BBB+), fell by two, six, and 10 points, respectively. Cannella says the credit "could trade up a bit more" through the end of August, because it has managed its finances well and fully expects to meet earnings forecasts. She declines to set a target for fair value.
"I've had my eye on JC Penney, but then I say 'wait a minute--there are too many department stores out there as it is,'" says Carolyn Gibbs, senior portfolio manager at Aim Funds in Houston. Gibbs questions the future of department stores given their competition from catalogs, the Internet and strip-malls.
Theresa Fennell, high-yield portfolio manager at American Century Investments in Mountain View, Calif., has been impressed with Penney's performance, but believes it has no more room to run. "It's a little too rich for high-yield, a little too risky for investment grade," she says. James Tuzzo, an investment-grade portfolio manager at Fiduciary Trust Company International in New York who has a mandate to buy high-yield, says his firm has stayed out of the retail sector altogether for several months. He, like the other managers, expects consumer spending to fall further, making JC Penney too risky a bet.