Activist Hedge Fund Takes a 10% Stake in Office Depot

Starboard Value LP, managed by Jeffrey Smith, is estimated to have assets under management in excess of $1 billion, and our records show that the fund has a 13F portfolio worth over $630 million. According to a Form 3 filing with the SEC last Friday, the fund now has a stake in Office Depot Inc. (NYSE:ODP) comprising more than 10% of the company’s outstanding shares of common stock. The filing, which was reported jointly by a variety of funds within the Starboard umbrella of operations, states that its ownership sits at 31.1 million shares worth a total of $76.8 million.

Jeff Smith

As of the end of last quarter, the hedge fund industry as a whole had limited exposure to Office Depot, with 17 funds holding a mere $29.7 million in the company’s stock. Some of the most prominent bulls at the time of their 13F filings were D.E. Shaw, Ken Griffin, Joel Greenblatt, and Jim Simons. Due to the fact that Starboard Value’s latest transaction increases total hedge fund interest in the office supply company by a factor of nearly four, it’s worth exploring the motives behind this purchase.

Since the start of 2012, shares of Office Depot have gained 14.9%, which is actually below the specialty retail industry’s average (32.6%), and middle-of-the-road compared to “brick and mortar” peers like Staples, Inc. (NASDAQ:SPLS) at -12.1%, OfficeMax Incorporated (NYSE:OMX) at 79.5%. The company’s web-based competitors, most notably Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc. (NASDAQ:EBAY), have also outperformed Office Depot over this timeframe.

Interestingly, the office supply retailer disappointed in its most recent earnings report, missing the Street’s second quarter revenue and earnings estimates quite badly. When the dust settled, Office Depot’s revenues came in at $2.51 billion, below the $2.60 billion analysts were expecting. Even worse, this total was 7.4% below Q2 2011 revenues. From an earnings standpoint, the company reported a loss of 14 cents a share, 5 cents worse than average estimates. By the end of next year, Office Depot is expected to improve its bottom line into profitable territory ($0.09), but the company’s recent whiff definitely gives investors reason to pause.

Assuming that it is able to flirt with earnings of a dime a share by next Christmas, Office Depot’s stock could see moderate price appreciation over the interim, as it currently sports deeply discounted Price-to-Earnings (10.9X) and Price-to-Book (1.0) multiples. Now, the bears can cry that any company with an earnings portrait as cloudy as this one deserves to trade at a cheaper valuation than its peers, but it’s notable that with a PEG ratio of 0.94, Office Depot is looking under-appreciated by the markets at the moment. While any stock with a PEG below 1.0 can be considered a good value-play, it is especially notable that Office Depot’ earnings growth also trades below the likes of OfficeMax (5.06), Amazon.com (10.07), and eBay (1.33).

One intriguing factor that most analyses of Office Depot don’t take into account is short sellers’ sentiment toward the stock. As of August 31st, Office Depot had a short percentage of float in excess of 14.0%, more than any of its aforementioned competitors, except for OfficeMax (20.5%). While it’s typically not considered to be a warning sign unless a stock has a short interest above 30%, this situation is monitoring when FINRA filings are reported at the end of this month.

To recap: Starboard Value’s recent move into Office Depot increased the hedge fund industry’s total interest in the stock from $29.7 million to $106.5 million. Shares of the office supply retailer have been a decent investment in 2012, though the company’s Q2 earnings miss represents a black eye on the company’s record, at least in the short term. By the end of 2013, analysts are expecting profitability out of Office Depot, and valuation metrics indicate that there is still a buying window here, assuming that short selling activity doesn’t get out of hand.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!