A Name Retailer for Pennies on the Dollar

08/17/2010 10:04 am EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says Office Depot is selling at a fraction of its 2007 peak, but warns of too much optimism in the short run.

Here is Fortune's take on Office Depot (NYSE: ODP): "It's been three hard years for Office Depot.

Key markets such as Florida and California got hammered in the downturn. It's lost customers to rival Staples. And it was embarrassed by a series of accounting scandals. Since trading at $38 in early 2007, shares have fallen 89% to penny-stock levels." (The stock closed at around $4 Monday—Editor.)

But [in an August 4th article—“Bottom Feeding: Office Depot’s Stock”]—Fortune has also found some fund managers and analysts who believe that sets the stage for a rebound.

William Blair's $700-million Small Cap Growth Fund bought 1.2 million ODP shares in the first quarter. Steve Cohen of SAC Capital Advisors and Lee Ainslie of Maverick Capital also added stakes this year.

Management is apparently serious about cleaning house. In 2009, it cut $680 million of operating expenses, mostly by closing 120 stores, and it reduced distribution centers from 33 to 12.

Elsewhere, J.P. Morgan analyst Christopher Horvers predicts that the shares will rise to $8 in the next year. Horvers recently wrote: It's "not the value fishing market right now, but nonetheless a lot of bad news is in this stock."

Options players have been extremely optimistic when it comes to ODP. The International Securities Exchange (ISE) reports that nearly 15 calls have been purchased to open for every one put purchased to open during [recent] trading sessions. This ratio of calls to puts is higher than 93.6% of all those taken during the past year.

Meanwhile, the Schaeffer's put/call open interest ratio [recently came] in at 0.47, as near-term call open interest [doubled] put open interest. This ratio is lower than 71% of all those taken during the past year, indicating that short-term options players have been more optimistically aligned only 29% of the time.

Short sellers are also starting to unwind their bearish bets. During the past month, the number of ODP shares sold short decreased by 24% to 16 million. However, more than 5% of the security's float remains sold short.

Technically speaking, the stock hasn't done much to earn this optimism. The shares are down more than 27% since the beginning of the year, and are still struggling with resistance at their ten- and 20-week moving averages, as well as resistance at the $5 level. Should the security suffer a technical rejection, it could discourage the option bulls, pressuring the stock even lower.

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