How to Play the Small Business Revival

03/10/2011 3:23 pm EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Office supplies retailers and related manufacturers will come back into fashion if the recovery’s benefits should trickle down, writes George Putnam III in The Turnaround Letter.

Small businesses were particularly hard hit during the 2008-2009 downturn, and they have been relatively slow to recover. However, we are beginning to see signs that the small-business sector is starting to turn up again.

Unfortunately, it is difficult for stock investors to invest in “small businesses” per se—but manufacturers of office products, and their retailers, could be good proxies for the small-business sector as a whole.

If the economy continues to rebound—as I expect—the small business sector could be the next area to benefit. And if that happens, the office products makers and retailers should begin to move up, some of them for the first time in many years.

With that in mind, we look at the three dominant retailers and several well-known manufacturers.

Staples (Nasdaq: SPLS) is credited with having created the office-supply superstore, and is by far the largest player in the market, with over $24 billion in annualized sales.

Revenues have grown every year over the last decade, but the stock trades below its level of the late 1990s.

Moreover, the company has a strong management team, healthy balance sheet, substantial cash flow and growing international diversification. This sector could be ready for a break-out and, if it comes, Staples is likely to lead the charge.

OfficeMax (NYSE: OMX) is number two of the big three: stronger than Office Depot, but not as strong as Staples. The company has a new CEO with a fresh viewpoint, since he comes from the foodservice industry.

The stock rebounded sharply from the depths of late 2008, but has been weak again in recent months. Earnings appear to be on the mend, and the stock price should follow.

Office Depot (NYSE: ODP), the third of the big three retailers, has suffered from some management turmoil. Last October, the company’s CEO resigned after agreeing to pay civil fines tied to disclosing inside information.

With the weakest balance sheet of the three retailers, Office Depot has the highest risk—but this leverage also boosts the return potential if industry conditions do indeed improve.

Avery Dennison (NYSE: AVY) is the dominant name in labels and other adhesive-backed supplies. Even though sales have generally grown over the last decade, the stock is no higher today than it was in 1997.

With a healthy balance sheet and a decent 2.4% dividend, the stock looks cheap, especially for a company with such a strong brand.

Boise (NYSE: BZ) is the paper and packaging segment that was spun out of forest products giant Boise Cascade. The new stock began trading in mid-2007, and, not surprisingly, it did not fare well for the next couple of years.

Management took action, cutting costs and shifting the product mix. Decent cash flow has allowed the company to reduce debt and also pay a special dividend last December.

Standard Register (NYSE: SR) provides business documents and workflow solutions. Healthcare accounts for about 38% of sales; financial services 28%; emerging businesses 25%; and industrials 9%.

While long-term technological trends are going against some of the company’s legacy, paper-based products, Standard Register is rapidly adding electronic offerings.

There is substantial rebound potential in the stock—and a generous 6.2% dividend yield, in case you have to wait for the bounce.

ACCO Brands’ (NYSE: ABD) new management team appears on track for delivering a sustained turnaround.

With the organization restructured and the debt refinanced, operating performance has steadily improved, including a return to profitability and growing cash flow. New products are supplementing ACCO’s powerful brand presence in everything from binders and staplers to computer-related products.

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