Sometimes good things happen to bad stocks — but that still doesn’t make them a buy, especially after the easy money has clearly been made.
Just look at Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX), which popped 18% and 14%, respectively, on Tuesday and are up 83% and 36% for the year-to-date — despite sales that are like slowly melting icebergs.
The proximate cause for the jump in these big-box office retail stocks was third-quarter earnings reports that beat Wall Street’s profit forecasts even as sales continued to fall. Going a bit further back, shares are up on speculation that the two troubled retailers could merge, especially after activist investor Starboard Value became Office Depot’s biggest shareholder in September.
ODP was going for about $1.50 a share before Starboard disclosed its stake. It shot above $2.60 on that development and now fetches more than $2.83. OfficeMax saw a similar trading pattern.
But if you need proof that this is a trader’s play that has nothing to do with the industry landscape, Staples (NASDAQ:SPLS), left out of the dance, has gone nowhere but down. Where ODP and OMX are soaring, Staples is off 15% over the last three months and down 18% for the year-to-date.
In other words, if it weren’t for Starboard, ODP and OMX would probably be in the toilet, too.
Now, you may remember the activist fund from its high-profile move into shares of AOL (NYSE:AOL). Starboard ultimately lost that proxy contest, but it’s pretty clear the pressure it brought to bear helped spur AOL to sell a billion-dollar patent portfolio to Microsoft (NASDAQ:MSFT).
No, Starboard didn’t change anything fundamental at AOL, but rattling that cage helped the struggling Internet company’s stock to nearly triple so far this year.
As with ODP and OMX, AOL has been a heck of a trade. Investors, however, have longer horizons, and when it comes to the strategic prospects for these companies, well, there’s a reason Staples’ stock has been such a dog. Starboard might have saved ODP and OMX from being value traps in the short run, but the fundamentals are still ugly.
As we’ve noted, Best Buy (NYSE:BBY), the nation’s biggest consumer electronics chain, might suffer from showrooming — where folks visit stores to check out gadgets before ultimately buying them online — but at least that gets customers in the door. The nation’s big-box office-supply chains don’t even enjoy the courtesy visits.
Competition from Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) is hurting these retailers in much the same way it’s crippling Best Buy. Throw in the awful economy both here and abroad — and, importantly, massive losses of government jobs at the local, state and federal level — and it’s clear sales aren’t picking up anytime soon.
ODP is forecast to post a 4.5% drop in revenue this year and have no sales growth next year, according to data from Thomson Reuters. OMX will see a sales slump this year and essentially flatline in 2013, too. Staples has a similar top-line trajectory.
Yes, Starboard might be able to squeeze more profits out of ODP. And a tie-up with OMX might make sense (never mind that most mergers don’t pan out, or that tying a rock to a stone won’t make it float).
The big-box office suppliers look to be facing a secular decline in revenue. And as the old saying goes, you can’t cut your way to growth.
As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.