ACCO Brands: With Significant Upside Potential, The Pullback In This $6 Stock Is Worth Buying Now

| About: ACCO Brands (ACCO)

ACCO Brands Corporation (NYSE:ACCO) may not be well known by many investors, but its products are some of the best-known brands in the industry. It manufactures and markets a wide variety of products that are found in many homes, offices, and universities, which include: Mead (paper products), Day-Timer and Day Runner (planners and organizers), Kensington (computer products), Wilson Jones (storage and organization), Five Star (notebooks and binders), Swingline (staples and staplers), Academie (drawing and construction papers), At-A-Glance (calendars), and many more. These are products that many of us use on a regular basis and the company sells to leading retailers such as Costco Wholesale Corporation (NASDAQ:COST), Staples, Inc. (NASDAQ:SPLS), and Office Depot (NYSE:ODP).

A significant market pullback has pushed the stock back from over $7, to about $6 per share. This has created another buying opportunity as the stock looks too cheap. Aside from the 5-day pullback in the stock market, an analyst at Sun Trust downgraded ACCO Brands shares by lowering the price target to $7 (from $8) on Monday, January 27, 2014. This appears to have created a great buying opportunity as the stock is oversold and a bargain. The downgrade appears to have created an exaggerated move to the downside due to it coming out at a time of significant market weakness. Also, the move down appears excessive since the Sun Trust analyst still has a $7 price target, which implies nearly 20% upside, and others have much higher price target of $9 per share. Furthermore, this company recently announced positive news that the market might re-focus on when it rebounds.

On January 14, 2014, this stock went up to about $7.25 per share (with heavy volume of nearly 2 million shares) on positive news from the company. The company announced that profits and revenues for 2013 would beat analyst estimates of $1.75 billion in revenues and 76 cents per share in profits. The company expects revenues to come in at $1.76 billion and for profits of 78-79 cents per share. Furthermore, analysts expect earnings to rise to 82 cents per share in 2014 and 92 cents per share in 2015. This company also has a solid balance sheet, with about $71 million in cash and around $1 billion in debt. Profitability, a solid balance sheet and industry-leading brand names all reduce potential downside risks for investors.

With earnings expected to come in at 82 cents for 2014 and to grow further in 2015, the stock is trading for just over 7 times earnings. This appears to be very undervalued when you consider that the S&P 500 Index (NYSEARCA:SPY) trades for about 16 times earnings. Even if the market wants to discount the price-to-earnings ratio, the current multiple is way too low because this company has world-famous brands, and it still has potential to grow earnings in the future, as analysts expect it will. A price-to-earnings ratio of 11 to 12 would put this stock at $9 to $10 per share, and even then it would still be trading at a major discount to the market. Analysts at Barclays have set a $9 price target for this stock, which seems reasonable, especially since that would just be putting the shares back around the 52-week high of $8.85.

A cheap valuation, earnings growth and multiple expansion are not the only reasons this stock could head higher. In the Q3 earnings report, Boris Elisman, president and chief executive officer, said that the company was accelerating cost-cutting initiatives in the near-term, which could lead to higher profits in the coming quarters. This, along with the news about better-than-expected revenues and profits, could also accelerate some short-covering when the market rebounds.

According to, there are about 16 million shares short and this stock has a recent trading volume average of nearly 670,000 shares per day. The short interest is equivalent to around 24 days' worth of average trading volume or about 14% of the float. When too many shorts get involved, this can be great for longs since shorts are like a guaranteed share buyback program (sooner or later). Shorts have had some real disasters in the past year; just look at the rise in companies like Pitney Bowes (NYSE:PBI), which makes postage meters. That stock has nearly doubled in just the past few months. R.R. Donnelley & Sons (NASDAQ:RRD), which prints paper products, has seen its shares also roughly double in the past year. The shorts were going heavy on these companies as well on the basis that products like postage meters and printed materials could not prosper in a digital world. While these companies might not be in fast-growing sectors, the stock performance has shown that these are still investment-worthy industries. It also shows that buying cheap shares in sound companies can lead to even more upside, when shorts can help to fuel the rally. I have no doubt that some shorts used the recent market weakness to push this stock lower, but I think shorts will also help to fuel a stock rally on better days.

FMR, LLC., (also known as mutual fund giant 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 about a 5% stake. I think this strong institutional ownership is something the shorts should consider, along with the many other positives mentioned above. In summary, this stock is worth buying in the market pullback. It might be poised to resume the recent uptrend thanks to a cheap valuation, better-than-expected financial results and the potential for a short-covering rally. Even the most bearish price target of $7 implies significant upside, and the $9 price target could lead to gains of about 50%.

The recent market pullback is a great opportunity to put cash to work. I am focused on buying cheap stocks like ACCO Brands as well as others which I recently wrote about here.

Here are some key points for ACCO Brands:

Current share price: $5.96
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.

Disclosure: I am long ACCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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