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Thursday, January 3, 2013 - 11:30
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Tuesday, January 8, 2013 - 11:12
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Thursday, January 3, 2013 - 11:30

This Unloved Stock Now Yields 4%

Thursday, January 03, 2013 11:30 AM

I'll never forget seeing my first office supply superstore while in college. While searching frantically for a typewriter ribbon on the eve of a critical paper being due, my roommate advised that a new office supply store had recently opened up just miles from our dorm.

Quickly heading there, I was shocked at the size of the store and variety of office supplies available. I was able to purchase the typewriter ribbon a great price but thought to myself, "There's no way this concept will last, these guys will be out of business soon." I reasoned that the market for office supplies could not possibly be large enough to support the overhead and infrastructure of that giant store.

Boy, was I wrong.

This company has expanded to a global scale with nearly 2,300 locations and $25 billion in annual revenue. Not only did this visionary company nail the rising demand for corporate office supplies, but it also was perfectly positioned to benefit from the boom in home-based businesses across the globe.

But right now, the company is struggling. E-commerce, high unemployment and tight business credit has forced the stock down more than 15% in 2012. I think this sell off has opened up a great opportunity for investors to snatch up shares on the cheap. It looks like I am in good company with this opinion, as hedge fund kingpin Ray Dalio's Bridgewater Associates holds more than $22 million worth of shares and just ramped up his holdings by nearly 220,000 in the third quarter of 2012. (You can see my recent article on Ray Dalio here.) Time has proven he is a good guy to have on your side.

If you haven't guessed it already, I am talking about office supply superstore Staples (NYSE: SPLS).

The company has a debt-to-equity ratio of only 27% and its cash flow from operations payout is 33%.

When compared to its electronic big box competitor Best Buy (NYSE: BBY) with a debt-to-equity-ratio of 57% and the fact it has paid out in excess of its cash flow during the past 12 months indicates Staples' resilience in a difficult market.

Staples reported third-quarter 2012 earnings of 46 cents a share, beating the consensus estimate by one cent, but internal headwinds remain strong.

There was a 2% decline in total sales of more than $6.3 million and profits decreased nearly 4%, while gross margin fell by one-half of a percent to 27.6%.

Staples is predicting flat revenue growth for its fiscal year 2013. While things may seem gloomy, the company is fighting back by slashing store sizes and adding new products to its mix to increase sales.

These cost-cutting and revenue-enhancing measures combined with an improving economy could likely lift shares higher.

A dividend-paying dynamo
What I like most about Staples right now is the company is a dividend-paying dynamo. Its stock presently yields 4% and has increased its dividend 9% during the past five years. If you are a retirement stocks aficionado like my colleague Carla Pasternak, the face behind High Yield Investing, then Staples is definitely worth a look.

Carla likes to find reliable stocks that regularly increase dividends. She calls these Retirement Savings Stocks. Whether you are currently retired, about to retire or just starting to build a nest egg, then I think the best time to buy Retirement Savings Stocks is now.

Technically, there is substantial support in the $11 a share range with a clear triple bottom on the daily chart. Although share price is below the 200-day simple moving average, eliminating Staples from a potential value buy zone candidate and entering now in the $11 a share range with stops right below $10 makes sense as support level play.

Risks to Consider: Although I expect the economy to improve and lift stocks like Staples, there is potential that improvement will not take place as rapidly as expected. In addition, the verdict is still out on the success of Staple's cost-cutting measures and product additions. Always use stops and position size wisely when investing.

Action to Take --> I like Staples right now as a long-term hold, but with tight stops. If stopped out, I would then use the $11 a share level as a breakout line to enter long again on a daily close above this level. The strategy is to enter now, with stops right below $10. My target price is $15 a share within 12 months.

P.S. -- If you're looking for a smarter, safer, and more profitable approach to income investing than you may be following now, then you need to know about Retirement Savings Stocks. Simply put, if you're looking for a second income stream for your retirement, then it's the only way to go. Find out more in this special presentation.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.