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Some companies find themselves striding directly into the teeth of serious secular headwinds. Others have ungainly operations, allowing rivals to outperform and leave them in the dust. Today, Motley Fool Alpha and Big Short analyst Matt Argersinger unveils two companies that somehow possess the gruesome combination of both ugly traits, and should soon be outstanding shorting opportunities.

An empty office
"I stepped into an Office Depot (NYSE: ODP  ) and I wasn't entirely sure the store was open," says Matt of his recent quest for ink. "You could almost hear the crickets. There were five employees for every customer. It got me thinking that perhaps this wasn't exactly a thriving, promising business."

Spurred by his visit to the office ghost town, Matt dug in and found a company in disarray. It's closing more stores than it's opening, and sales are still 25% below their prerecession peak. With a still-tight economy; online retailers' eroding sales, especially on smaller items; and the Wal-Marts of the world allowing people to get their paper shredders and binders at the same place they get their underwear and dog food, this wouldn't seem to be a great time to be an office-supply superstore. But rival Staples (Nasdaq: SPLS  ) has somehow been able to maintain its sales growth and has continued to expand, and suddenly Office Depot is looking like a particularly bad actor in a bad movie.

Then there's the fact that BC Partners tossed Office Depot a $350 million lifeline in 2009. Office Depot is saddled with 10% interest payments and the specter of BC converting its preferred stock to common stock and diluting shares, and it's not hard to see why Matt thinks this company could go to zero.

Not much Kelly green
The picture is not much prettier for Kelly Services (Nasdaq: KELYA  ) , a temporary-staffing business that seems to be feeling stronger industry headwinds than its rivals.

"I really don't like this business in general," says Matt. "They are responsible for all their workers' costs and its clients can cut off the relationship whenever they want. Plus there are thousands of temp staffing agencies in the country, and this one seems to be siding with the have-nots."

On the other side of the equation are Manpower (NYSE: MAN  ) and Robert Half International (NYSE: RHI  ) , which have grown sales and increased their footprint in this fractured industry. "These companies show that even in a tough economic environment, companies can perform," Matt says. "Kelly can't pass along all the blame."

It doesn't help Matt's impression of the business that the chairman of the company owns 93% of B-class shares, and those happen to be the only shares with voting power. The fact that shares trade at 18 times forward earnings -- higher than the industry average -- also has Matt scratching his head.

Wait, don't short just yet
While both these companies have a faint stench wafting over their tickers, it's probably not time to bury them quite yet.

"As the economy continues to recover, people will buy a few more printers, hire a couple more temps, and generally give some investors reason to believe these companies are on the rise," Matt says. "I think there's a chance we'll see a modest run-up for either or both of them, but once that industrywide enthusiasm and optimism fade, these two are ready for a fall. These are two outstanding long-term shorting opportunities."

So start watching. When you click either of the links below, you'll automatically create a free personalized watchlist that already lists the stock. It'll let you keep a watchful eye on these companies, plus you'll get instant access to "6 Stocks to Watch from David and Tom Gardner," a free report on a handful of companies the Fool's co-founding brothers think you should be watching. The watchlist service and the report are free when you click either of the links below, or just enter your email in the box below and we'll create a watchlist just for you, already loaded up with one of the tickers from the free report.

Roger Friedman owns none of the companies mentioned. Kelly Services and Office Depot are Motley Fool Big Short short-sale choices. Staples is a Motley Fool Stock Advisor recommendation. Motley Fool Alpha has opened a short position on Kelly Services. Motley Fool Alpha has opened a short position on Office Depot. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (5)

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  • Report this Comment On March 14, 2011, at 8:36 PM, toddoogles wrote:

    Really Roger? How many Office Depot did you visit? How many times? What hours?

    If you are telling thousands of people to get ready to short a stock, I do hope you have some in depth analytics in addition to your one visit......

    And BC partners is a good thing! --they're some smart people with lots of money and they dont have a history of making bad investments....but Im sure you researched their portfolio and past trends...(right).

    BTW-- in regards to their pre-recession earnings--- did you happen to notice ODP is closing the gap on losses?--finishing negative 2% last quarter from negative 6,8 ,10 respectively the past quarters....what about the $1Billion they have in cash and the potential new leadership with a new CEO????

    According to your peers that actually do more research than visit a store and declare "short!!!", they feel ODP has tremendous up side...

    show some responsible journalism and do more home work man....

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Related Tickers

10/21/2016 3:59 PM
KELYA $18.46 Down -0.06 -0.32%
Kelly Services CAPS Rating: ***
ODP $3.26 Down -0.06 -1.81%
Office Depot CAPS Rating: **
MAN $79.99 Up +7.08 +9.71%
ManpowerGroup CAPS Rating: *****
RHI $38.88 Up +0.69 +1.81%
Robert Half Intern… CAPS Rating: *****
SPLS $7.54 Down -0.01 -0.13%
Staples CAPS Rating: **