In investing, there are few things more satisfying than finding a stock hiding in plain sight.
When a company's story is generally misunderstood, savvy investors are often given a chance to pounce at a great price.
I think the market is currently underestimating the No. 2 Internet retailer in America. Here's how under the radar it is: If I gave you three guesses, I bet you couldn't name it.
Surprised? I was. And the surprises kept coming the further I dug.
If you asked the average Joe for his view on Staples, he'd mention its physical stores and maybe the "easy button" from the ads. But Staples isn't Best Buy or RadioShack. Unlike regular bricks-and-mortar retailers, it gets roughly half its business from delivery operations, which are predominantly done online. And its sales are 80% from business customers.
Accentuating these facts, Staples has two competitive advantages:
- Its size, buying power, and private label strategy combine to create a low-cost provider in the office supplies market, making it hard for direct competitors Office Depot (NYS: ODP) and Office Max (NYS: OMX) to survive, much less compete.
- Its business focus allows Staples to differentiate from low-cost threats including Amazon.com, Wal-Mart, and Costco. Its established relationships and hand-holding strategy combine to make life easier on purchasing managers at medium-sized businesses, Staples' sweet spot. If you doubt how big a factor ease of use plays versus cost in corporate America, just think about how much companies pay for last-minute business flights versus what its employees will pay for vacation flights.
At this point, you may be convinced Staples is more than meets the eye, but you're probably wondering where the growth comes from. After all, office supplies don't come to mind when you think "growth industry." Staples already has a significant international presence (one-fifth of sales), but much of that is in Europe, which is struggling with its sovereign debt and resulting economic issues now. There's some growth in physical storefronts each year, but it's a very small percentage.
No, Staples' opportunities for growth are also a bit hidden. Remember we talked about how Staples seeks good relationships with purchasing managers at companies? Like McDonald's getting you to buy some fries with that Big Mac, Staples is looking to expand the average spending by its customers by upselling -- in this case, to print and copy services, facilities and break room supplies, and technology products and support. Basically, it's trying to be a user-friendly, one-stop shop in the business-to-business market.
In addition to broadening its products and services, Staples is looking to expand its margins by selling a greater percentage of its private label supplies. In other words, its store brand products. Assuming similar quality, it's a win-win for Staples and the customer. Customers save 10%-15% versus brand name supplies and Staples generates higher margins. Staples has already been a master at this -- generating a quarter of sales from private label items. It's looking to push that higher.
And Staples (as well as Amazon.com, Wal-Mart, and Costco) has an opportunity to pick apart weaker competitors -- specifically Office Depot and Office Max. While Staples has shown growth and consistent profitability over the last few years, we see declining sales and profitability struggles for the other two. Their pain can be Staples' gain.
So I hope it's clear by now that Staples is much more than the red storefronts you drive by -- it's a smartly managed business-to-business powerhouse. And it's selling near five-year lows, at less than 10 times next year's expected earnings.
I'm bullish on Staples and think it would make an excellent buy to kick off the new year. But our chief investment officer has identified a different company as his No. 1 stock for the next year. Find out which stock he likes in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this legendary company.
At the time this article was published Anand Chokkavelu owns shares of RadioShack, Apple, McDonald's, and Best Buy. The Motley Fool owns shares of Apple, Amazon.com, Wal-Mart Stores, Costco Wholesale, RadioShack, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com, Costco Wholesale, McDonald's, Dell, Wal-Mart Stores, Staples, and Apple. Motley Fool newsletter services have recommended writing covered calls in Best Buy, creating a diagonal call position in Wal-Mart Stores, and creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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