Office Depot's Significant Gains: More to Come

We've all enjoyed a good rally in the past couple weeks, but where are the stocks that have been knocked down so badly that the potential profits are mind-blowing?

A few weeks ago, I had my eyes on Office Depot, Inc. (ODP) priced at nearly $0.70. On April 16th, 2009 the price is $1.94. That's a 177% RETURN!

Take a look at the stock chart from early March to mid-April:

The great thing about this stock is that it still has a lot of upside potential left, even in the short-term because it has been knocked down so far.

The reason why Office Depot's stock was (and still is) so cheap is because they took a huge write-down on impaired assets four Q4 2008. I would bet that they decided to take these write-downs in the midst of all of the financial company write-downs. This way they look really good when things start to turn around in both the stock market and the real economy.

The only problem with this stock is that the company and the office supply industry as a whole has reached a high saturation level, and it is not expected to grow significantly in the next two years.

However, this stock is way undervalued for a solid household name like Office Depot. Compared to its competitors, Staples (SPLS) and OfficeMax (OMX), it is very undervalued and has huge price discovery potential for the future.

What to take from this stock analysis is that Office Depot (ODP) can be a great short term play if you expect earnings to be dismal for the Q1 2009 results that will be reported on 4/28, and you sell right before. On the other hand, it could also be a long-term (2-4yrs) investment; the stock could potentially go back up to its 52 week high of $14.40!

How would you like to have a 640% return on your investment in 2-4 years? It's possible.

There are very few investments in the world that exist with this kind of return. As I, Warren Buffett, and many other investors believe, this market has presented opportunities of a lifetime.

Disclosure: Long ODP

Comments

[specsit:]

I am glad to see someone considering the multibagger potential of this beaten down stock, which I own.

I do belive that current extreme market conditions have presented the average investor with numerous "once in a generation" opportunities on a properly evaluated risk/reward basis.

I will be following this recommendation.

Apr 19 11:57 AM

[brantII:]

As an industry veteran in office products, I could not disagree more with the writer's assessment of Depot. If he had done his homework he would have realized that OD is currently under investigation for "bait and switch" practices and has already agreed to pay a few hundred thousand dollars to the City of Berkeley in California for over-charges. Many states including California (Refund of 2.4M) Florida, Missouri, and North Carolina have investigated Depot and a few including N.C. and Georgia have either not allowed them to bid again or have stated publicly that they will no longer buy from them. After the City of Berkeley was promised payment school districts and municipalities across the U.S. have initiated their own investigations with the hope of recovering significant amounts of cash. Most of these folks use the same or similar contract to the "US Communities L.A. County Agreement" based in California. The size of this contract in yearly spend is somewhere between 500M and 700M dollars. If "errors" have been occurring for years within this contract (which they have) I would not bet a dime on Depot's future and Jared Schneider's recommendation like so many from the analyst community could end up costing investors millions.

Apr 19 02:47 PM

[22thoroughbred:]

I started buying about 4-6 weeks ago at $1.25 and sold some Oct. $2.50 calls and some Jan $2.50 calls against 1/2 my posn. the premium at the time was about .40 on the Oct and .70 on the Jan. so my cost basis is .85 and .55, and now it looks like I may be stuck with a triple and a 5 bagger (approx) on 1/2 the posn. which means the rest are less than free....if you bought Monday and sold the July $2.50 calls you could get .40 and have a cost basis of $1.72 or a double if called...in this market, not bad at all

Apr 19 11:48 PM

[22thoroughbred:]

I appreciate what you say as far as fines, bait & switch, etc. BUT it would take 9-12 months before any "investigation" yields anything, by then, i'm out, as i'm sure the author is as well....not a 3-5 year hold by any means


On Apr 19 02:47 PM brantII wrote:

> As an industry veteran in office products, I could not disagree more
> with the writer's assessment of Depot. If he had done his homework
> he would have realized that OD is currently under investigation for
> "bait and switch" practices and has already agreed to pay a few hundred
> thousand dollars to the City of Berkeley in California for over-charges.
> Many states including California (Refund of 2.4M) Florida, Missouri,
> and North Carolina have investigated Depot and a few including N.C.
> and Georgia have either not allowed them to bid again or have stated
> publicly that they will no longer buy from them. After the City of
> Berkeley was promised payment school districts and municipalities
> across the U.S. have initiated their own investigations with the
> hope of recovering significant amounts of cash. Most of these folks
> use the same or similar contract to the "US Communities L.A. County
> Agreement" based in California. The size of this contract in yearly
> spend is somewhere between 500M and 700M dollars. If "errors" have
> been occurring for years within this contract (which they have) I
> would not bet a dime on Depot's future and Jared Schneider's recommendation
> like so many from the analyst community could end up costing investors
> millions.

Apr 19 11:50 PM

[22thoroughbred:]

BTW....Look at SWHC for the same strategy....the call premium on short term calls is way too high

Apr 19 11:51 PM