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Wells Fargo (WFC) recently conducted a study examining how a retail company’s earnings estimates affected its stock price.
Out of the 51 retail businesses in the sample, the study showed that earnings estimates declined on a year-over-year basis for 42 of them.
Now, given the adage that stock prices follow earnings, researchers expected to see a decline in stock prices proportionate to the earnings dips.
Instead, something strange and twisted happened…
Only 13 of the 42 companies with lower earnings estimates (or 31%) actually experienced a lower stock price.
The takeaway?
Investors appear to give retailers the benefit of the doubt when it comes to falling earnings estimates.
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And that, in part, may help explain why Piper Jaffray raised its price target to $14 on the department store retailer, J.C. Penney (JCP), despite the company’s still-troubling earnings outlook.
It would seem the impetus behind the higher target were comparable store results coming in at 3%, three times higher than previous projections of just 1%.
Analysts indicated that the increased sales were likely the result of better weather this year compared to last year.
In addition to the weather hypothesis, some are hoping that Apple’s (AAPL) soon-to-be released watch will result in increased mall traffic, therefore benefiting retailers like J.C. Penney and its beleaguered stock.
In response to Jaffray’s upgrade, JCP shares spiked more than 7.4% on Tuesday. The news also brings renewed hope to JCP shareholders that the company is finally turning a corner.
