One company is coming back in the tough retail sector and another is making its name in the fiercely competitive automotive space says Marilyn Cohen of Bond Smart Investor.

Last month, we ventured into a retail name more for the yield and lack of debt than anything else (the name was GAP Stores). This month we will add on to the short retail list with a company that my clients rode as a turnaround story many years ago. Times are different now, much different.

JCPenney’s (JCP) market position, retailing prowess, and finances are somewhat worse than before their last turnaround. You may recall that Allen Questrom accomplished this feat after he left Federated Department Stores to run JCPenney.

Certainly, the JCPenney financial results stink. Revenues are down, EBITDA is down, there’s too much discounting and too many promotions. No wonder Penney’s customers are confused. It’s impossible to foresee if the new CEO, Ron Johnson, who was Apple’s (AAPL) retail wunderkind, will be up to the turnaround task. As a betting person and considering the risk-reward, I’m betting on the turnaround happening.

Ron Johnson is a smart, focused manager. He appointed Michael Francis from Target (TGT) as CEO, along with two former Apple executives as Chief Operating Officer and Chief Talent Officer. The JCP makeover is being funded with free cash flow, so hopefully there won’t be any more downgrades.

Penney’s balance sheet is not leveraged to the hilt. The company’s debt is around $3 billion, with a bank revolver of $1.5 billion maturing in 2016. With approximately $17.4 billion in projected sales and $1.2 billion in 2012 EBITDA, these metrics say now is the time for the turnaround, rebranding, and Penney’s makeover to take place.

To accomplish all that needs to be done, leverage may increase to 4x. Since it is impossible to know what maturity holes are in your portfolio, here are two JCPenney choices. Don’t buy both issues—select the one whose maturity fits your need. And keep your portfolio allocation to 3% to 5%, no more.

  • Buy the JC Penney Corp. Inc. Non-callable 7.65% due August 15, 2016 (CUSIP: 708160BJ4)
  • or JC Penney Corp. Inc. Non-callable 5.65% due June 1, 2020 (CUSIP: 708130AD1)

A High-Speed Auto Play
In case you haven’t noticed, I’ve been constructive—very constructive—on the auto industry for some time. Whether it is Ford (F), Goodyear, Lear, American Axle, or Borg Warner (BWA), I like the industry and its growth potential.

Now let’s turn our focus to the retailers. Some of the big names are AutoNation, Inc. (AN), Penske Automotive Group, Lithia Motors, Group 1 Automotive Inc., and Sonic Automotive.

Out of the group, AutoNation rises to the top. The company sells, finances, and services new and used cars. When looking at the Form 10K, AutoNation sports good gross profits.

You read the papers—you know that our aging fleet of cars on the road is slowly being replaced with new cars. New vehicle sales volume is growing. This year appears to be a continuation of a good operating atmosphere. The recovery of the automobile and truck industries has been documented and reinforced by our many recommendations.

AutoNation is capturing its share of business. Financing new and used cars has become easier, and company profitability will expand along with a growing economy. Analysts have pounded on the fact that AutoNation is the lowest-cost operator in its most important geographic markets (Texas, Nevada, California, and Florida).

AutoNation’s February sales rose 17% year over year. The company has a good balance sheet, free cash flow, high profit margins in the parts and service businesses. The only “but” here is that the company has repurchased $1 billion of its stock since 2009. At least they didn’t sell debt for those share repurchases.

Debt is moderate and earnings prospects look good. This bond is a clear winner. Buy one of the issues that best suits your portfolio needs.

  • Buy the AutoNation, Inc. Non-callable 6.75% due April 15, 2018 (CUSIP: 05329WAJ1).

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