Is Staples A Buy?

With shares of Staples (NASDAQ:SPLS) trading around $12, is SPLS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Staples is an office products company. it operates in three business segments: North American Stores & Online, North American Commercial and International Operations. Staples serves businesses of all sizes and consumers in North America, Europe, Australia, South America and Asia. The company’s North American Commercial segment consists of the United States and Canadian businesses that sell and deliver office products and services directly to businesses and includes Staples Advantage and Quill.com. Through its segments, Staples is able to serve the consumer and business community by offering products and services required for daily operations.

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T = Technicals on the Stock Chart are Weak

Staples stock has seen a consistent decline from highs established in late 2006. The stock is now trading towards the lower end of a multi-year range but does not appear to be gaining its footing just yet. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Staples is trading around key averages which signal neutral price action in the near-term.

SPLS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Staples options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Staples Options

31.62%

50%

52%

What does this mean? This means that investors or traders are buying a good amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a good amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Staples’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Staples look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-67.50%

-289.36%

-28%

-3.57%

Revenue Growth (Y-O-Y)

3.76%

-1.98%

-5.53%

-1.10%

Earnings Reaction

-7.14%

2.57%

-14.63%

-5.69%

Staples has seen decreasing earnings and revenue figures over the last four quarters. From these figures, the markets have been disappointed with Staples’s recent earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

How has Staples stock done relative to its peers, Office Depot (NYSE:ODP), OfficeMax (NYSE:OMX), United Stationers (NASDAQ:USTR), and sector?

Staples

Office Depot

OfficeMax

United Stationers

Sector

Year-to-Date Return

9.61%

17.23%

17.42%

9.07%

15.17%

Staples has been a relative underperformer, year-to-date.

Conclusion

Staples provides products and services that are essential to the daily operations of businesses and consumers across the globe. The stock has not done so well in recent years as it has mostly been in a decline or stagnant. Earnings and revenue figures have been shrinking which has not been positive for investors. Relative to its peers and sector, Staples has trailed most of its peers and sector in year-to-date performance. WAIT AND SEE what Staples does this coming quarter.

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