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Acco Brands Corporation (ACCO) is one of the largest suppliers of branded office products. It sells products in more than 100 countries under many well known brand names to major retail chains which include: Swingline (staples and staplers), Mead (paper products), Day-Timer and Day Runner (planners and organizers), Kensington (computer products), Wilson Jones (storage and organization), Five Star (notebooks and binders), Academie (drawing and construction papers), At-A-Glance (calenders) and many more.

While sales of planners like Day-Timers may be slowing as digital organizer apps on iPhones and other mobile devices grow in popularity, this company does benefit from this growing segment since it offers laptop and mobile security locks, power adapters, chargers, mice, keyboards, trackballs, universal docking stations, desktop accessories, carrying cases and iPad and iPhone accessories. Although some investors (mainly shorts) seem to think that we will soon live in a world that does not use paper, staples, or binders, that is simply not the case. The company clearly offers so many products that continue to be very popular and it continues to expand its tech related offerings and accessories.

Acco Brands reported earnings recently which were below analyst estimates and this caused the stock to drop. For the third quarter of 2013, the company earned 25 cents per share on revenues of $469.2 million, versus estimates of 33 cents per share and revenue estimates of $487.4 million. For the full year, the company expects earnings to come in between 78 to 81 cents per share. Boris Elisman, President and Chief Executive Officer, stated:

"We remain confident in our free cash flow target of $150 million for the year and will continue to lower debt to ultimately improve shareholder return. In addition, given the challenging environment, we will accelerate our cost reduction initiatives in the near term."

At current levels, the stock looks very undervalued. For example, it is trading for close to book value which is $5.62 per share. The market capitalization is about $665 million which appears cheap for a company with free cash flow of about $150 million per year. Analysts expect the company to earn about 85 cents per share in 2014, and 96 cents per share in 2015. That means this company is trading for just around 7 times earnings. This also indicates the stock is very undervalued, especially since the average stock in the S&P 500 Index (SPY) now trades for about 16 times earnings.

The CFO of Acco Brands appears to be viewing the recent pullback in the stock as a buying opportunity. On November 5, 2013, Neal V. Fenwick purchased 8,074 shares at $5.57 each in a transaction worth about $45,000. It's worth noting that he also purchased shares earlier this year. On June 6, he purchased 11,479 shares at $6.63 in a transaction worth nearly $76,000. On June 5, he bought 3,521 shares at $6.63 in a deal valued at about $23,000. I view these transactions as a bullish sign since there has been repeated insider buying and because it is coming from the Chief Financial Officer. A CFO is typically very savvy in analyzing financial trends and forecasts, and has full access and a deep understanding of the numbers, so when you see a CFO buying stock it can be a more meaningful indicator. Some leading institutional investors also have been buying Acco shares. For example, FMR, LLC., (otherwise known as Fidelity) owns over 10 million shares which is equivalent to about 9.35% of the entire company. Vanguard owns over 6 million shares which is equivalent to more than a 5% stake in Acco Brands and a number of other top asset managers also have significant stakes.

Acco Brands is profitable and it has a solid balance sheet with about $71 million in cash and revenues of roughly $1.8 billion per year. This makes debt of about $1 billion appear very reasonable so there seems to be little downside risk in terms of the balance sheet. Another recession is a potential downside risk to consider but that does not seem likely now. Of course, the shorts might want investors to believe that office supplies are doomed, but you would not know that by looking at the valuations of two major Acco Brands customers:

Office Depot, Inc. (ODP) is a major retailer of office supplies and it carries many of the products that Acco Brands makes. Analysts expect Office Depot to earn just 2 cents per share in 2013, and 26 cents per share for 2014. Since the shares trade at about $5.35, this puts the forward price to earnings ratio at over 20 times.

Staples, Inc. (SPLS) is another leading retailer in this sector. It also carries many products that are made by Acco Brands. Analysts expect Staples to earn $1.23 per share in fiscal year 2014, and $1.31 per share in fiscal year 2015. Staples shares trade for over $15 which gives this stock a price to earnings ratio of about 12 times. With Acco Brands being a leading supplier to both of these companies and with its stock trading for about 7 times forward earnings estimates, it is trading at a bargain valuation. In fact, if I owned shares of Office Depot or Staples, I would be a seller and use those proceeds to buy Acco Brands which trades at a much more compelling valuation and with what appears to be more upside.

Shorts have been targeting this stock and have benefited from the recent pullback. However, shorts could provide just what this stock needs to see an extended rally into January. According to Shortsqueeze.com, there are nearly 16 million shares short and this stock trades an average of about 472,000 shares per day. This means the short interest is equivalent to around 33 days worth of average trading volume or about 14% of the float. That is enough to put shorts at risk of a squeeze especially in early January when the pressure from tax loss selling in this stock will come to an end. At this point, I view the short interest as a positive because short covering could ignite an exaggerated move to the upside and position this stock for a January Effect Rally. Earlier this year, analysts at Barclays set a $9 price target for Acco shares which implies upside potential of nearly 50% from current levels.

Here are some key points for Acco Brands:
Current share price: $6.50
The 52 week range is $5.56 to $9.16
Earnings estimates for 2013: 76 cents per share
Earnings estimates for 2014: 82 cents per share
Annual dividend: none

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Source: Acco Brands: This $6 Stock Bargain Is A Top Pick For A January Effect Rally