Something explodes inside of me whenever I am challenged. I can't quite explain it, but my body gets warm and tingly and the walls seem to close in. It's at that specific moment that all I see is an attacker barreling straight ahead that must be stopped -- in my case with closely-held financial facts which I never showed them that I hold dear.
On Sunday evening I wrote a piece for my firm Belus Capital Advisors on office supplies retailer Staples (SPLS), which elicited an amazingly positive response from my peer network. Take note that I am not a trader, and neither is a good deal of my client base. I truly believe I was given a superhuman power to predict long-term futures for publicly-traded companies that comprise our daily existence. In the attempt to share this power with the masses on Staples, come closer to the screen and read what I envision in the future for this company.
- Large box store selling low margin products when online stores are in the power of a person's hand is not a recipe for long-term success.
- A well-entrenched, well-tenured CEO is not moving quick enough to exit a low margin international business that is now operating at a loss, despite store closures.
- Large box retailers not selling food have to reinvent themselves to drive consistent traffic post-recession. For Staples, I would like to see it build small business workstations in the unproductive back of its store, and rent the space daily/monthly.
- The Staples contract business strikes me as in a state of decay long-term. Why? Businesses are being run out of incubators and Starbucks! No need to stock a supply room with candy and non-soft paper towels.
The bottom line is this: I challenge a person to step to me on the bull side on Staples. I am not talking about a quick trade based on a positive reaction for a new, wasteful, share repurchase plan. I am referencing a good old-fashioned, longer-term deep-dive analysis.
What I want to hear are explicit reasons why the business, as presently structured (too many global stores, non-reinvented store floor) will be around in the year 2020, and the stock price up 300% since the day a post goes live. In the meanwhile, chew on these stats that showcase a business with structural issues not being made any easier by industry shifts:
- Free cash flow 2012: $870 million
- Free cash flow 2009: $1.8 billion
Chart of the Day: Utilities ETF
I think that the relative underperformance of utilities is a nice indication that the rally is poised to continue. To these eyes, froth creep in stock prices will continue so long as the market analyzes all data as Fed friendly and Yellen and Bernanke do not drop a comment bomb that threatens the liquidity assumptions of the bulls. It amazes me, nonetheless, that this is how a stockpicker has to think nowadays, first Fed and then company-specific. But, is there any other explanation for the run in consumer discretionary stocks into what will be fourth quarter 2013 earnings warnings over the next two weeks? Liquidity on!
The Utilities Select Sector SPDR (XLU)
Source: Yahoo! Finance
Consumer Discret Selector Sector SPDR (XLY)
Source: Yahoo! Finance
Around the Horn
- Best Buy (BBY) landed a bunch of late to the party upgrades on Monday, makes me wonder if I should downgrade my firm's long-running buy rating on the stock (best pick of 2013 so far). Here is why the company is winning:
- I think we are headed for a massive holiday quarter earnings warning from Aeropostale (ARO). Hearing some things. Remember, you heard it here first!