One big potential issue: Penney is cutting out "unproductive inventory" -- items that don't sell as much. This supposedly brings down costs by reducing the amount of money tied up in inventory, but it may be a terrible move. Even though less-popular items don't sell as much, they bring in loyal customers who buy lots of other stuff while they're in the store.

Wal-MartStores (WMT) reduced the number of items for sale in 2009 to "reduce clutter," the same logic Penney is using now. Wal-Mart has since returned a lot of these items to the aisles, because the change cut into shopping trips, hurting overall sales. "These big shots sitting in their offices, they want to have this clarity," says Davidowitz. "But how about the customer? The customer is everything."

5. Will creating a 'mall within a mall' really help?

Citing much higher sales per square foot at specialty stores compared with department stores, the new team at J.C. Penney is setting up a lot of "stores" inside Penney.

To show the potential here, Ackman and Penney managers like to cite the sales per square foot of over $600 at Penney's Sephora beauty product shops, compared with $154 a square foot at Penney overall.

Eventually, a Penney store could have 100 or more shops, like Martha Stewart and Michael Graves in home goods, or Watchgear by Tourneau Watches & Accessories.

This might help because Macy's, which uses this "mall within a mall" concept, has sales per square foot at $174, near the hoped-for target at Penney of $177. But it's not a lock. "Sephora is a success, but is strong enough to pull it off. Most brands are not," says the former retail chain CEO.

Buy below $23

J.C. Penney and Ackman declined to talk with me. But in news releases and comments to analysts, Penney says it offers great values and is changing for the better. The company says 2012 is the "transition year," and growth will follow in 2013.

Meantime, wait for further declines to buy. Goldman Sachs (GS) analyst Adrianne Shapira has a neutral rating on Penney. Deutsche Bank's Grom is waiting for clearer signs that the Penney overhaul is working. Morgan Stanley's Michelle Clark sees more downside risk, and she suggests considering a buy below $23.

"I think there is hope," says Davidowitz. "But Penney is going to have to slow down and re-strategize." My guess is they will, so I'll go with Clark's $23 as a buy limit.

Stocks mentioned in this article include: J.C. Penney (JCP), Sears (SHLD) and Apple (AAPL).

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.