Office Depot (NYSE:ODP) shares surged as much as 14% on Monday after an “activist investment firm” said it has taken a 13% stake in the company.
Who cares? ODP stock is doomed — so don’t buy the head fake.
Sanford C. Bernstein & Co. analyst Colin McGranahan said it best in this MarketWatch article: Whatever the stake from big-name firm Starboard, “the challenging topline environment will remain a headwind to profitability, and that the company’s free cash flow will inherently limit (its) pace of initiatives.”
In short, brick-and-mortar office supply retail is not a growth business, and the specific balance sheet of ODP remains a mess no matter what. The company is projected to record yet another annual loss in fiscal 2012.
There might be a bit of a short squeeze here going on as those on the downside bail out. ODP stock had roughly 14% of its float held short as of last month and had a short ratio of 7.3.
For those unfamiliar with the metric, short ratio is the amount of time (in days) it would take bearish traders to cover all their bets based on current volume. So in simple terms, it would take seven full days of trading to bleed all the shorts out — and it seems like some have cut and run now rather than get caught in a bad spot down the road.
But the bottom line is that Office Depot’s business sucks. If Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ) are seeing earnings dry up since they can’t sell laptops, what do you think the score is at ODP? And with Amazon (NASDAQ:AMZN) and other e-commerce sites dominating, why would anyone stumble around Office Depot instead of getting stuff online? Or just picking the gear up at Wal-Mart (NYSE:WMT) or Target (NYSE:TGT) with the rest of their back-to-school shopping?
The Office Depot bounce is naive. Even more ridiculous is the sympathy bounce we are seeing in Staples (NASDAQ:SPLS) and OfficeMax (NYSE:OMX)! They are both equally cooked and don’t even have the Starboard headline to help.
If you own ODP and are long, sell now. If you’re short, I would sit tight if you can and wait for the squeeze to end.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a long position in Apple.