It’s no secret that J.C. Penney (NYSE: JCP) has become a retail disaster over the past five years.

The top line has fallen each year since 2007, from sales of $19.9 billion to last year’s $12.9 billion. Earnings have followed suit, slipping from 2007’s profit of $1.15 billion to a net loss of $985 million in 2012.#-ad_banner-#

In an attempt to stop the bleeding, J.C. Penney’s biggest shareholder, billionaire hedge-fund manager Bill Ackman, was forced to abruptly remove CEO Ron Johnson from his post last month.

Few may disagree with the reason for the decision, and many would agree that making such a change in the midst of a mess is likely only to aggravate the retailer’s woes and add to the list of reasons not to become a shareholder.

But sometimes the best time to step into a stock is when it’s a train wreck. It can often be a headache, but when done right, the person brought in to clean up the mess can help investors make a lot of money.

To show you what I mean, take a look at what happened with Yahoo (Nasdaq: YHOO). StreetAuthority’s Amy Calistri told her Stock of the Month readers that Yahoo was a “buy” back in August of last year, three weeks after Marissa Mayer took the reins of a company many thought was unsalvageable.

The stock’s up about 50% since then and still going strong, largely on the heels of Mayer’s focus on mobile and smarter acquisitions.

So what needs to happen at J.C. Penney to drive its stock to Yahoo-like success? Three things:

1. There can be no doubt as to the one thing Ron Johnson unwisely axed during his short tenure at J.C. Penney’s, and the one thing Ullman needs to reinstate now: well-advertised, crystal-clear, theme-driven sales, complete with newspaper inserts and TV commercials. We’ve seen a glimpse of a return to this approach already, but consumers have yet to see the 590 promotions J.C. Penney was running each year before Johnson took over.

As insane as that frequency of sale-based advertising seems, especially at $2 million a pop, it was still more effective than Johnson’s “everyday value” approach. It’s effective because it’s the approach the company had trained its best customers to respond to for decades. Old habits die hard, and new ones are tough to start.

2. Back to basics. The conversion of J.C. Penney stores into a “shop within a shop” venue had its merits, which Johnson was quick to tout. The shops’ sales per square foot were phenomenal, hovering around $260 per year compared with an average of $134 per year for other areas of its stores. The math, however, never quite added up.

While the shops were doing well, overall sales were falling at double-digit rates; 2012’s revenue was lower by 25%. Translation: Either the upside of the specialty shops was being overestimated, or the weakness from the rest of the store was being understated; it may have been a mixture of both.

Regardless, it’s pretty clear that the focus on higher-profile brand names like Joe Fresh and Liz Claiborne was more than upending sales of basics like socks and underwear. Ullman needs to get that bread-and-butter business back.

3. While missions one and two are fairly specific, the third item on Ullman’s agenda is a little more ambiguous, though still palpable. He needs to assure investors that the capitalization structure is stable.

Between significant credit-rating downgrades from Moody’s and Standard & Poor’s, a $1.75 billion senior secured loan from Goldman Sachs that’s costing the company an extra $100 million each year, a capital expenditure plan that took $810 million out of the coffers last year (a plan that is likely to linger into 2013), and rumors of a strategic Chapter 11 bankruptcy filing, shareholders are understandably worried about being on the wrong end of a bad situation. Investors will need to trust that dilution — or a total wipeout — isn’t on the table before the stock can really take flight.

Risks to consider: A failure to complete all three of these tasks could prove to be a drag on the stock, but the biggest threat posed to J.C. Penney shareholders remains the stores’ performance. Rising sales could solve a lot of problems, and even if Ullman can cross these tasks off of his to-do list, it might all be for nothing unless it translates into measurable revenue growth within a couple of quarters.

Action to take –> For the time being, no action is needed other than observation. But if it soon becomes clear Ullman is taking care of these three particular issues, wading back into a J.C. Penney position could make good sense. It may feel a little uneasy to step in and try to catch a falling knife before the repair work is done. However, waiting until it’s clear the company is back on track may mean a great deal of gains from the stock have been missed; the market has a way of handicapping the future pretty effectively. If you can find that sweet spot between the J.C. Penney’s green shoots and it being in full bloom again, Yahoo-like upside in relatively short order isn’t out of the question.

P.S. — StreetAuthority’s Amy Calistri has one objective for readers of Stock of the Month… to provide one quality stock pick each month, with in-depth analysis in plain English that investors can understand. In fact, she just released a special presentation, “How to Beat the Stock Market… In Just 12 Minutes per Month,” which tells you more about her strategy. Go here to learn more.