Office Depot: Ending the Dumpster Dive

A couple of months ago, I wrote a favorable article about Office Depot (ODP), based on increasing free cash flow and a recent price turn. The stock was trading just above a dollar at that time, and is now at 4.20, a four bagger.

In my personal portfolio I took profits a while ago but thought I would state my reasons to question the stock at its current valuation.

Long term prospects are not good. The paperless office concept is becoming a reality - paper products will never go away entirely but use will diminish over time. Eight years ago I had a file folder for every stock I ever owned, stuffed full of printouts and trade confirmations. Today I have the equivalent material on my hard drive, or available on-line from my broker for periods of up to ten years.

Competition is intense. Staples (SPLS) is better organized and more profitable, and many grocery and department stores have paper goods sections where a selection of commonly used items is readily available. Back to school sales and other promotions erode profits. Office Depot had a large presence in California and Florida, two economically troubled states.

The paper clip will eventually go the way of the record made of wax.

At a price of 1 dollar, tangible book at 4.69 a share provided margin of security. Visibility about cash flow for the coming year was fairly good. At a price of 4.xx, and with efforts to raise cash by reducing inventory and closing stores not boding well for future growth, now would be a good time to say farewell.

Disclosure: no positions