JC Penney (JCP) posted another bad quarter Friday and chopped its 2012 guidance. So why is the stock up more than 3%?

It looks like investors are putting their faith in CEO Ron Johnson, who admitted that he made some mistakes this year but said the company is still on track with its transformation. He promised the company would "stay the course."

Johnson said traffic is getting better, and he has hopes for a solid holiday season.

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He makes it sound like JC Penney has turned a corner, and investors seem to be buying it. And now some think the stock, down 34% so far this year, is undervalued.

The numbers alone paint a picture of a company in bad shape. Sales at established stores (those open more than a year) fell 22%, a pretty shocking plunge, and online sales fell 33%. Overall sales were down 23% to $3.02 billion.

Penney also reported a loss of $147 million, or 67 cents a share, from a profit of $14 million, or 7 cents a share, a year earlier. Excluding one-time expenses and other items, the loss was 37 cents per share. Analysts were expecting a loss of 26 cents.

Part of the reason was that Penney shut down its marketing engine in the middle of the quarter, which ended July 28. Johnson realized that people were confused by the pricing initiatives, so the company canceled its advertising campaigns and stepped back to rethink strategy.

It decided on a new pricing policy. It's now going to make dramatic, permanent price cuts throughout much of the store, and it's getting rid of the monthlong bursts of sales it previously used. Johnson described it as simplifying the pricing. "Early response to these efforts has been very encouraging," he said in a call with analysts.

It's not getting better yet. In fact, Penney withdrew its earnings guidance for the year, saying it won't meet its previous earnings target of $2.16 a share, but didn't give more details.

You'd think it would all be enough to send investors fleeing for the exits. But they're sticking around, just in case Johnson is right.

"I am completely confident that our transformation is on track," he said, according to The Associated Press. "But it is very clear that withdrawing from our promotional model to a more everyday model has been harder than we anticipated."