J.C. Penney Company, Inc. (JCP), Best Buy Co., Inc. (BBY): Performance Does Not Indicate Value for these Two Retailers

3. If a company trades at a deep discount to its revenue then I don’t really care about top line growth. However, a loss of 28% compared to near flat revenue growth is also a very telling metric of performance and market presence. Personally, I don’t want to own a company with a near 30% loss in revenue, but I don’t mind owning a stock with flat growth that is trading at a deep discount compared to others in its industry (i.e., Wal-Mart Stores, Inc. (NYSE:WMT) trades with a price/sales over 0.50).

4. Cash flow is my favorite metric of all, because you can dig deep and find hidden problems that can’t be found on an income statement. In the case of Best Buy Co., Inc. (NYSE:BBY) and J.C. Penney, this is unnecessary, because you can clearly see the difference between a loss and a gain of $1.59 billion. In addition, this informs us that Best Buy’s forward P/E ratio of 10.74 is possible due to operational efficiency. Meanwhile, J.C. Penney Company, Inc. (NYSE:JCP)’s negative operating cash flow despite sales of almost $13 billion indicates that there are still many operational issues present and that profit could be distant.

5. Finally, with all things considered, the cherry on top is that Best Buy pays a yield of 3% while J.C. Penney does not pay a yield. As an investor, I would much rather own the cheaper and more efficient company that pays a yield versus the more expensive one with extreme revenue loss that has no profit in sight and does not return yield to shareholders.

Conclusion

One of the core principles in my book, Taking Charge With Value Investing (McGraw-Hill, 2013), is to not let price and performance dictate an opinion of an investment. There is a misconception that losses have to equal value, and that a stock trending higher could not possibly present deep value. However, this is not true, as Best Buy Co., Inc. (NYSE:BBY) has doubled yet is still fundamentally cheap with far greater upside versus its downside. In my opinion, this is a stock that you want to watch closely, one that could trade considerably higher in the years ahead.

Brian Nichols is long Best Buy. The Motley Fool has no position in any of the stocks mentioned.