Friday, March 4, 2011

Acquire J.C. Penney (JCP) Puts Says Morgan Stanley (MS)

Morgan Stanley (NYSE:MS) recommends that traders acquire puts on J.C. Penney (NYSE:JCP), citing higher costs and the inability of the retailer to raise prices.

Christopher Metli and Sivan Mahadevan, strategists at Morgan Stanley, recommend purchasing May $32 puts while selling May $27 puts.

The two said, “The competitive environment will thwart efforts to raise prices. Put spreads give downside exposure to cost inflation and excess inventory pressuring the stock.”

Most of this is predicated on the rising price of cotton, which has risen 13 percent just from February 24 through March 2.

China is behind the rising prices, as demand continues to grow while supply remains constrained.

For J.C. Penney and other relevant retailers, this will make a significant impact on margins and earnings.

J.C. Penney closed Thursday at $33.94, down $0.29, or 0.85 percent.

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