1 Stock to Buy in January

In investing, there are few things more satisfying than finding a stock hiding in plain sight.

When a company's story is generally misunderstood, savvy investors are often given a chance to pounce at a great price.

I think the market is currently underestimating the No. 2 Internet retailer in America. Here's how under the radar it is: If I gave you three guesses, I bet you couldn't name it.

Amazon.com (Nasdaq: AMZN  ) is No. 1. But the No. 2 online retailer is Staples (Nasdaq: SPLS  ) . Yes, it has more online sales than Wal-Mart (NYSE: WMT  ) , Dell, or Apple.

Surprised? I was. And the surprises kept coming the further I dug.

If you asked the average Joe for his view on Staples, he'd mention its physical stores and maybe the "easy button" from the ads. But Staples isn't Best Buy or RadioShack. Unlike regular bricks-and-mortar retailers, it gets roughly half its business from delivery operations, which are predominantly done online. And its sales are 80% from business customers.

Accentuating these facts, Staples has two competitive advantages:

  1. Its size, buying power, and private label strategy combine to create a low-cost provider in the office supplies market, making it hard for direct competitors Office Depot (NYSE: ODP  ) and Office Max (NYSE: OMX  ) to survive, much less compete.
  2. Its business focus allows Staples to differentiate from low-cost threats including Amazon.com, Wal-Mart, and Costco. Its established relationships and hand-holding strategy combine to make life easier on purchasing managers at medium-sized businesses, Staples' sweet spot. If you doubt how big a factor ease of use plays versus cost in corporate America, just think about how much companies pay for last-minute business flights versus what its employees will pay for vacation flights.

At this point, you may be convinced Staples is more than meets the eye, but you're probably wondering where the growth comes from. After all, office supplies don't come to mind when you think "growth industry." Staples already has a significant international presence (one-fifth of sales), but much of that is in Europe, which is struggling with its sovereign debt and resulting economic issues now. There's some growth in physical storefronts each year, but it's a very small percentage.

No, Staples' opportunities for growth are also a bit hidden. Remember we talked about how Staples seeks good relationships with purchasing managers at companies? Like McDonald's getting you to buy some fries with that Big Mac, Staples is looking to expand the average spending by its customers by upselling -- in this case, to print and copy services, facilities and break room supplies, and technology products and support. Basically, it's trying to be a user-friendly, one-stop shop in the business-to-business market.

In addition to broadening its products and services, Staples is looking to expand its margins by selling a greater percentage of its private label supplies. In other words, its store brand products. Assuming similar quality, it's a win-win for Staples and the customer. Customers save 10%-15% versus brand name supplies and Staples generates higher margins. Staples has already been a master at this -- generating a quarter of sales from private label items. It's looking to push that higher.  

And Staples (as well as Amazon.com, Wal-Mart, and Costco) has an opportunity to pick apart weaker competitors -- specifically Office Depot and Office Max. While Staples has shown growth and consistent profitability over the last few years, we see declining sales and profitability struggles for the other two. Their pain can be Staples' gain.

So I hope it's clear by now that Staples is much more than the red storefronts you drive by -- it's a smartly managed business-to-business powerhouse. And it's selling near five-year lows, at less than 10 times next year's expected earnings.

I'm bullish on Staples and think it would make an excellent buy to kick off the new year. But our chief investment officer has identified a different company as his No. 1 stock for the next year. Find out which stock he likes in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this legendary company.

Anand Chokkavelu owns shares of RadioShack, Apple, McDonald's, and Best Buy. The Motley Fool owns shares of Apple, Amazon.com, Wal-Mart Stores, Costco Wholesale, RadioShack, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com, Costco Wholesale, McDonald's, Dell, Wal-Mart Stores, Staples, and Apple. Motley Fool newsletter services have recommended writing covered calls in Best Buy, creating a diagonal call position in Wal-Mart Stores, and creating a bull call spread position in Apple. 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 (35) | Recommend This Article (206)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 03, 2012, at 5:07 PM, DonkeyJunk wrote:

    In an increasingly paperless world, I'm not entirely convinced. If you can get me past that, I'll be a believer, if not a zealot.

  • Report this Comment On January 03, 2012, at 5:27 PM, fastracker wrote:

    If Staples is outshining both Office Max and Office Depot why are they showing larger increases in share price than Staples today?

  • Report this Comment On January 03, 2012, at 5:46 PM, jm7700229 wrote:

    "World demand for paper and paperboard is forecast to grow by 2.1% annually in the long term, reaching an estimated 490 million tons by the year 2020", according to a study published in Paper Age. It goes on to state that world paper production is currently triple what it was in the '60s, before the computer age took off.

    Keep in mind, though, that Staples is a lot more than paper, and although it's not a fast growing market for the next few years, Staples is increasing its market share inexorably, and that matters. A lot. I think this is a bargain worth looking at.

  • Report this Comment On January 03, 2012, at 5:50 PM, mikecart1 wrote:

    I see with my eyes, not with my ears and I see the Staples up the street in a pretty well-off area of town (lots of sick cars and big houses with people not knowing what to do with all their money), in a mall area next to a Target, Kohls, Lowes, and several smaller stores, on a well paved parking lot area, off a busy intersection and street, near many fast food and restaurants, the parking lot at Staples is usually more empty than any other store.

    These are the facts and they are undisputed. :)

  • Report this Comment On January 03, 2012, at 6:05 PM, TMFBomb wrote:

    @DonkeyJunk,

    Yes, a key consideration.

    @jm7700229,

    And an interesting rebuttal.

    @fastracker,

    It's because Staples' share price is low that I'm interested.

  • Report this Comment On January 03, 2012, at 6:06 PM, TMFBomb wrote:

    @mikecart1,

    Luckily there's the Internet!

    -A

  • Report this Comment On January 03, 2012, at 7:03 PM, OPTIONNUT wrote:

    Happy New Year,

    How about considering ebay? Seems they might have been in your analysis!

  • Report this Comment On January 03, 2012, at 8:20 PM, barakn wrote:

    The online side of the business has to carry the dead weight of the brick and mortar side. Every time I've been in a Staples store, it has been virtually devoid of customers and employees. The customers aren't there because the prices are high and the service is slow or nonexistent.

  • Report this Comment On January 03, 2012, at 10:35 PM, JohnnyYuma13 wrote:

    Staples? I don't think so.

  • Report this Comment On January 04, 2012, at 2:53 AM, richie54 wrote:

    Anand,

    Time for a field trip to Framingham, Massachusetts. Once you do this you'll see that Ameresco is the better buy of the Framingham-based companies.

  • Report this Comment On January 04, 2012, at 9:24 AM, tms5881 wrote:

    The internet has created more of a level playing field on pricing, and commoditizing office supplies. Companies have to differentiate themselves in this segment or simply become a lost cost provider which squeezes profit out of the bottom line. Logistics used to give companies an edge as well but companies are converging on best practices in this area as well. In office supply the main staple of business (no pun intended) seems to have always been about getting the customer in on cheap large buys (like paper), using the convenience factor of already having them as a client to upsell on other products, and services, and get an opportunity to build that personal relationship with the customer. That personal contact creates some emotional switching costs that you don't get when buying everying direct off the internet. Remember that the buyers of office supplies are usually low man (usually woman) on the totem pole, and having someone service them for a change is a small side benefit of the job. Sounds like Staples gets it, and is moving to differentiate itself on the service side, and build positive customer relations as well as being the "problem solver" in a complex and fast paced work environment. Conversely this effort takes some investment in time and money and pulbicly traded companies bend to the pressure of the market and shareholders for short-term gains at the expense of this longer view, where private Companies like CDW (which is more technology focused than Staples, but never the less...) aren't subject to these external pressures.

  • Report this Comment On January 04, 2012, at 1:38 PM, JackShephard wrote:

    While there are some indications that the stock may be undervalued - the low levels of capital investment would concern me. May not be a bad stock to own in a side-ways market for dividends which seem to be high quality.

    http://www.analytixinsight.com/Catalog/company/analysis-snap...

  • Report this Comment On January 06, 2012, at 11:04 AM, wytcld wrote:

    @mikecart1

    Not my experience. There are three Staples within a half hour of me. The stores are well-merchandised. The staff is plentiful, helpful and knowledgeable. And while the parking lots in front of them are not full, there's a constant stream of customers darting in for purchases. But that's the nature of office supplies - you want to pick them up efficiently. So if the store is well stocked and well arranged inside, with staff to help if you do need help finding something, you should be in and out in 10 minutes. Doesn't keep the parking lot filled. But it doesn't mean they aren't doing good business.

    That said, if it's computer equipment, I find much better deals online elsewhere. But for paper, pens, and other basic supplies Staples is the obvious place to go. And their prices are good there too, especially compared to the old-line office supply catalogs.

  • Report this Comment On January 06, 2012, at 11:32 AM, 100tradejack wrote:

    The massive sell of on 5/18/2011 is a sign of what's coming for SPLS: more sell-offs.

    Jack

    100 TRADE JACK

  • Report this Comment On January 06, 2012, at 11:40 AM, 88melter wrote:

    eBay, no dividend, Amazon, no dividend, Office Max, no dividend, Office Depot, no dividend. Staples, dividend of 2.75. I rest my case. The other article on this MF page talks about companies not paying dividends at their own peril. You bet.

    Any company that is funding dividend payouts from a reasonable cash flow and has a balanced balance sheet i.e manageable debt, will rise in price, not only due to sound fundamentals, but because, as we all know, share prices reflect demand for a stock, and demand for dividend payers will continue to rise.

    Happy dividend-collecting to us all.

  • Report this Comment On January 06, 2012, at 12:02 PM, Deathmonkey wrote:

    I can't quite agree with Staples. I personally have started a small business in the last few months. I went to the Staples next door to my office and was shocked at the prices. (10 bucks for a pair of scissors!). I created a prime account on Amazon and paid ~30% less for all of my office supplies.

    Amazon is the correct stock in this posting - I think its the long term pick. (and why I own it, and why it's recommended by TMF)

  • Report this Comment On January 06, 2012, at 12:24 PM, InApickle2009 wrote:

    I frequent Staples, Office Depot and Office Max. Staples prices all ways seem to be higher than the other two, so I tend to buy my supplies at Office Depot, Office Max, and yes, Walmart. These days I am less inclined to visit Staples in favor of the others as my first stop, and many times only stop.

  • Report this Comment On January 06, 2012, at 12:53 PM, wkussmaul wrote:

    RE "World demand for paper and paperboard is forecast to grow by 2.1% annually in the long term, reaching an estimated 490 million tons by the year 2020", according to a study published in Paper Age"

    I wonder what Paperless Age would have to say about that statistic :-) The BRIC countries with their massive numbers of people going from poor (no administrative life) to lower middle class (a world of literacy and paperwork) will skew these numbers temporarily. But soon they will join us here in the old first world in abandoning newspapers, magazines, and (relevant to this discussion) stationery and paper forms.

  • Report this Comment On January 06, 2012, at 12:58 PM, meatmann50 wrote:

    I'm really dis-appointed in the research done for this article....It doesn't take much research to find that APPLE IS THE # 2 ON-LINE RETAILER....behind only Amazon....Anand should be barred from writing any more articles...I've cancelled one subscription from Motley fool and may cancell another after reading this.....

  • Report this Comment On January 06, 2012, at 2:16 PM, Sedlo123 wrote:

    Dear Netflix Brothers,

    Got any other great ideas ? Reading not too long ago that Netflix should be a CORE holding !! What planet are you guys from ? You both need to find a new way to make a living.

    Sedlo

  • Report this Comment On January 06, 2012, at 4:03 PM, donbcms wrote:

    Staples' customer sevice & returns policy has it all over the other two; + add in dividends? I'll check it out!

  • Report this Comment On January 06, 2012, at 6:55 PM, Educationist wrote:

    Internet companies most of them are like Enron. Just a paper and one fine morning when you wake up you might see the stock has fallen like a hot potato!

  • Report this Comment On January 06, 2012, at 7:26 PM, grambo45 wrote:

    Staples is Anand's pick.

    For the Motley Fool Stock for 2012 click the link above........and be happy you didn't notice it before, 'cause PriceSmart, lost $9.95/sh today. 14%.

    I suppose that means it's time to "buy on the dip"?

    Hmmmmmmm...........

    Maybe not.

  • Report this Comment On January 06, 2012, at 8:42 PM, ppower7648 wrote:

    I just recieved a new laptop replacement ( under their protection plan) for one I bought at Staples 2 years ago that crashed. Thier customer service is exceptional -No hassles and EASY ! That is why I will buy another laptop etc..from them.

    I also run a satellite office for my company from my home and use Staples all the time for shipping and office supplies. Price is not an issue when the job just needs to get done quickly.

    I will be buying Staples stock !

  • Report this Comment On January 06, 2012, at 11:54 PM, Scoop106 wrote:

    Cannot believe I just read this article published by MF. A minute later I see an article over the name of MF titled "Staples' May Not Be What It Seems." It did not meet the smell test on Intangible Assets Ratio. This appraiser did not like anyone have over 20% of assets in Goodwill. Staples has 34%. The article was published in the last 13 hours.

    Ouch!

  • Report this Comment On January 07, 2012, at 12:34 AM, SirGalahad71 wrote:

    I, like a few others, noticed that on one hand we were being told that Staples was a good buy and on the other hand told to be weary. To those people and myself I submit the following:

    "Motley Fool newsletter services have recommended buying shares of (Insert relivant stock here). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors."

    It maybe that MF is providing 2 opposing views on this, but I think it's a good thing to see that not everyone is drinking the same cool aid. It reminded me that not everyone will see something the same way.

    At the end of the day I now have more information to help me make a more informed choice and that is what this is, at least partly, about. Otherwise we would all have stock brokers doing our thinking for us and making our stock picks.

    Ummm Sedlo, Netflix went up $9 in one day and $6 the next. What exactly are you saying?

    I WISH I'd had the available funds to buy at $69.

  • Report this Comment On January 07, 2012, at 12:27 PM, Silentcal wrote:

    Amazon at a PE of 89 times sounds more like Cisco ten years ago. Apple's low PE makes sense and it too is a great growth stock, Amazon is also getting into a technology business where there a lot of low cost players, who can ruin its game kindle game plan.

  • Report this Comment On January 08, 2012, at 9:53 AM, GtownRJ wrote:

    I would say, "One Stock To Watch".

    Some interesting fundamentals on this one, but it also seems like some interesting accounting (red flag?) to get there.

    I like that they pay a dividend and have an active stock buyback, but they borrowed heavy last quarter to get there, even in a time when revenue almost doubled from a down Q2.

    As mentioned, they have an awful lot of GW and Intangibles, but subtracting them still leaves a small profit.

    They do not have an earnings value less than 10%, so they are a good but not great value.

    Technically they are peaking in a sideways trend and most likely have a small pull back before earnings.

    This is not a screaming buy (like AAPL at $325), but given its potential to grab market share it is worth keeping an eye on.

  • Report this Comment On January 08, 2012, at 11:41 AM, NanooGeek wrote:

    I wonder about cash flow. For example, a case of paper advertised for less than $22, but at checkout nearly $49, and in 6-8 weeks the customer may get back a $27 discount (if the rebate is sent in properly), in the form of a prepaid Visa card.

    Rebates are a commonly used retail tactic, but for more than 50% off seems a little desparate.

  • Report this Comment On January 08, 2012, at 2:48 PM, momklok wrote:

    Staples carries very few products made in the USA. They help keep American jobs overseas. Boycott Staples and tell them why.

  • Report this Comment On January 09, 2012, at 2:15 PM, ecm3131 wrote:

    momklok - I like the way you think.

    Everything at Staples is Made in China even when there are US-made products competing. We choose to buy elsewhere, even if at a small premium.

  • Report this Comment On January 10, 2012, at 11:24 AM, RobertC314 wrote:

    @meatmann50

    Not sure where you get your numbers. Apple is the UK's number 2 online retailer if you're a Brit, but taking your advice and running a quick search of "largest online retailers" yields the following online sales numbers:

    Amazon: $34.2B

    Staples: $10.2B

    Apple: $5.2B

    (http://www.internetretailer.com/top500/list/)

    If you're going to post something like that, at least put a source, and maybe try to keep the discussion intellectual and not attack the writer personally - it makes you look ignorant and removes any credibility you might have regardless of whether your right or not.

  • Report this Comment On January 11, 2012, at 3:12 AM, shanehackett wrote:

    With the headline of "1 Stock to Buy in January" I guess I was expecting more. There's so much I don't like about Staples it's hard to want to make an investment in an office supply company. It isn't going to make a dent in Sam's Club or Costco business. I'm just not a believer. Shane Hackett http://www.shane-hackett.com

  • Report this Comment On January 11, 2012, at 5:15 PM, jagindustries wrote:

    @fastracker

    it's called beta

  • Report this Comment On January 11, 2012, at 11:38 PM, TaoOfPatrick wrote:

    If i can drink it,smoke it,or put in my tank,Iam well informed but retail is for better minds then mine.

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