Goldman Sachs (GS): Bankruptcy For J.C. Penney Company, Inc. (JCP) After 57% Decline In 2013?

Investors love to buy beaten down stocks. That's because stocks that have seen huge losses frequently rebound and produce big returns when management or a hedge-fund activist successfully agitates for change.

We've seen that process unfold numerous times this year, with Netflix, Inc. (NFLX), Chesapeake Corp. (CHK) and Herbalife Ltd (HLF) all posting huge gains as some of the best rebound stories of the year.

But while these companies successfully executed compelling reversals, there is another that continues to fail miserably at it. And that means investors looking for the next big rebound or turnaround story need to stay far away from this stock.

I'm talking about JC Penney Co. (JCP). After attempting to execute a big turnaround strategy in the last few years, shares have been pummeled in 2013, now down 57% on the year after a 14% beat down today. Take a look at the sharp contraction below.

Those losses were also fueled by the very public failure of hedge-fund billionaire Bill Ackman to agitate for a big turnaround. Although JC Penney did launch a strong campaign, hiring the architect of the hugely successful Apple stores, after three long years of waiting for the reversal, Ackman finally threw the towel in in late August, selling his entire stake of 39 million shares for an eye-popping $500 million loss.

But looking forward, another huge player on the Street just warned investors to stay very far away from this flailing company and stock. In spite of lending the beaten-down retailer $2 billion early in 2013, Goldman Sachs just released a dire prognosis on JCP, warning that the company's serious liquidity issues could push it into bankruptcy. As it stands, JCP expects to close the year with $1.5 billion in cash. But with a burn rate of about $1.1 billion per quarter, Goldman suggests that the end game is very near from JCP with new lenders unwilling to step in and support the company as it continues to bleed cash.

The carnage also shows up in estimates, with analy! sts calling for a loss of $5.78 in 2013 and $2.53 in 2014, down from $2.02 just 90 days ago. Clearly that is a trend moving in the wrong direction. And another big warning to investors that this is a company and stock that is beyond the point of no return.

The Takeaway

Failing companies can frequently produce big returns for investors when management or hedge-fund activists push for changes. But in the case of JCP Penney, the company looks beyond the point of no return. That led hedge-fund billionaire Bill Ackman to dump 39 million shares and absorb a $500 million loss less than a month ago. It also led leading-investment bank Goldman Sachs to suggest the company would be forced into bankruptcy. That means investors looking for the next big turnaround story should stay far away from JC Penney, as this old-line retailer looks to be going to way of the Dodo bird and VCR.

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