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."
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