What do Best Buy (NYSE: BBY ) , Staples (Nasdaq: SPLS ) , and RadioShack (NYSE: RSH ) have in common?
Yes, each is a specialty retailer fighting against increased competition from Amazon.com, Wal-Mart, Target, Costco, et al. But here's the surprising part: I'm bullish on all three.
For the same reasons I'm bullish on Best Buy, Staples, and RadioShack, I'm bearish on one retailer.
The market is beating down on specialty retailers because of the tenuous economy and seemingly insurmountable threats. They're seen as dinosaurs whose margins will get punished as they try to compete with the low-price one-stop-shop experience that Wal-Mart provides physically and Amazon provides virtually.
It's a valid fear.
In fact, when I look at most brick-and-mortar retailers, I do so with a negative bias from the get-go. That said, these three caught my attention because their valuations are discounting the heck out of their past performances.
Over the last five years, each has shown strong earnings leading to strong free cash flows. Each trades at a sub-10 multiple to its five-year average profitability. Each steadily returns capital to investors via dividends -- Best Buy yields 2.6%, Staples yields 2.8%, and RadioShack yields 5.1%.
And most important, I believe each will put up a better fight than the market's giving them credit for.
The other company I'm thinking of falls short in every one of these categories.
So while Staples is my "1 Stock to Buy in January," its archnemesis Office Depot (NYSE: ODP ) is my "1 Stock to Sell by February."
On the surface, Staples and Office Depot have similar office-supply-and-services-slinging business models -- both surprisingly place on the list of top 10 Internet retailers, both rely heavily on the business-to-business market, and both have a significant international presence.
But as any football coach will tell you, it all comes down to execution.
While Staples has been growing sales (granted, with the help of the Corporate Express acquisition a few years ago), Office Depot has shrunk sales by 26% since 2007. While Staples has maintained healthy earnings and cash flows throughout the tough economic times, Office Depot hasn't had the virtuous combination of positive earnings and positive free cash flow since 2006. While Staples covers its interest by a factor of eight, Office Depot is at less than two. And, of course, that leaves no room for Office Depot to pay a dividend.
Staples is clearly the better company here. Let's also not forget that Office Max (NYSE: OMX ) , though highly levered, is doing better than Office Depot operationally as well.
Now, the danger for Office Depot bears like me is that its stock is so beaten down (it's trading at well less than 10% of the market cap of Staples) that if its turnaround plans come to fruition, we could see a tremendous upside.
But hoping and wishing and praying for a third-in-class specialty retailer to suddenly start turning the tide on its proven direct competitors and Wal-Mart, Target, Costco, Amazon, et al. in an iffy economy is a pure gamble.
Do yourself a favor and avoid Office Depot. Look into Staples instead. Or look into the retailer our chief investment officer has identified as his No. 1 stock for the next year 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.