A good sign for those investors who think J.C. Penney can reverse course and fix most of what Ron Johnson screwed up:

So let's be optimistic for a moment (I still believe these bullish assumptions are possible but far easier said than done), and assume the company can get back half of the sales it has lost over the last two years and also boost profit margins back up to 2011 levels now that Mike Ullman is back at the helm. In 2011, JCP's revenue was $17.3 billion, gross margin was 36%, and EBITDA margins were 5.6%, for cash flow of $967 million.

Under a "recovered" scenario, JCP's sales get back to $15 billion, gross profit is $5.4 billion, SG&A is $4.5 billion, and EBITDA is $900 million. Macy's trades at 6x cash flow so we'll give JCP the same multiple, which equates to an equity value of $3.3 billion (net debt is $2.1 billion). Crunch all those numbers and you get a stock price of $15.50 per share, below where it trades today. So you can see why I am not loading up on the stock. That said, the bonds look like a great way to play the thesis can JCP survive without thriving.

Full Disclosure: Long JCP's 2018 senior notes and JCP Jan '14 $20 puts at the time of writing, but positions may change at any time