1 Stock to Sell by February

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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, 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.

Anand Chokkavelu owns shares of RadioShack and Best Buy. The Motley Fool owns shares of RadioShack, Costco Wholesale, Best Buy, Wal-Mart Stores, and Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Staples,, and Costco Wholesale. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores and writing covered calls in Best Buy. 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 (9) | Recommend This Article (72)

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 11, 2012, at 5:23 PM, psl8er wrote:

    OSG Overseas Shipholding Group has had sudden large volume run up but is now overpriced, SELL.

  • Report this Comment On January 11, 2012, at 7:16 PM, elsonso wrote:

    Larry Downs article in doesn't speak to well for Best Buy. Says BB is on its way out & makes a compelling argument.

  • Report this Comment On January 11, 2012, at 10:40 PM, TMFBomb wrote:


    Thanks for sharing. I enjoyed the article:

    Fool on,


  • Report this Comment On January 12, 2012, at 9:45 PM, Ironbob wrote:

    If Best Buy is on the way out could someone explain why their stores were packed this xmas and even after?

  • Report this Comment On January 13, 2012, at 1:32 PM, stantp wrote:

    Pretty much all the stores I saw around and after were crowded. I' also seen people walking out without a purchase and then a lot were exchanging or just returning gifts. Take that into consideration.

  • Report this Comment On January 14, 2012, at 10:48 PM, dcflipflop wrote:

    "...their valuations are discounting the heck out of their past performances."

    As far as Best Buy is concerned, I think the key word here is "past."

    I agree with the Forbes article that Best Buy is on the way out. Try searching for something on Best Buy's website. Instead of making you want to hop in your car and go to the store to buy it (a la the Target or Wal-mart websites), it encourages you instead to go to... a different website.

    If they realize how messed up they are, they might have a chance to turn things around, but it seems like their chances are slipping away more and more as time passes.

  • Report this Comment On January 16, 2012, at 7:58 PM, tomfooltom wrote:

    Best Buy is a showroom for Amazon !

  • Report this Comment On January 19, 2012, at 12:44 PM, GVinvesting wrote:

    OMX is actually in a net cash position if you look closer.

  • Report this Comment On January 23, 2012, at 4:15 PM, Cavyr wrote:

    Thanks for the timely advice. I sold ODP for $2.40!!!

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Related Tickers

10/26/2016 1:10 PM
ODP $3.19 Up +0.02 +0.63%
Office Depot CAPS Rating: **
BBY $39.37 Up +0.11 +0.28%
Best Buy CAPS Rating: *
OMX.DL $0.00 Down +0.00 +0.00%
OfficeMax CAPS Rating: *
RSHCQ $0.00 Down +0.00 +0.00%
RadioShack CAPS Rating: *
SPLS $7.50 Down -0.03 -0.43%
Staples CAPS Rating: **