Schaeffer's Market Observation Features Office Depot, OfficeMax, and Staples

Business Wire, August 28, 2006

CINCINNATI -- Among the stocks featured in this Schaeffer's Market Observation are Office Depot (NYSE:ODP), OfficeMax (NYSE:OMX), and Staples (NASDAQ:SPLS). Schaeffer's S&P 500 Index Hot Stocks is just one of the many free market commentaries written every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research. For additional information about this report or to have it delivered to you free via email every day click on the following link. http://www.schaeffersresearch.com/redirect.aspx?CODE=PROAW13M&PAGE=1 .

School Daze - Part I

"Up in the mornin' and out to school
The teacher is teachin' the Golden Rule
American history and practical math
You study 'em hard and hopin' to pass"

----"School Days," Chuck Berry, After School Session (1958)

On Friday (http://www.schaeffersresearch.com/commentary/premium/bgscommentary. aspx?ID=17218)(Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.), my colleague Jocelynn Drake delved into the world of back-to-school shopping, highlighting some broad apparel retailers and reporting that:

"The National Retail Federation (NRF) reported that 68 percent of parents say their kids influence at least half of back-to-school spending this year, up from just 53 percent last year. What's more, the group noted that total back-to-school sales will top $54 billion in 2006, up 13 percent from $47.8 billion in 2005."

Over the next few days, as the sound of the chalk amplifies and the sun-kissed youth of America has to once again set its alarm clocks, I'd like to take some time to focus on many angles of scholarship. Today we begin with the tools of the trade. For the past few weeks, students across the nation have been stocking up on supplies from old-fashioned graphite pencils to the most advanced graphing calculators. When I was first sent into scholastic battle with my E.T. lunch box and my Jordache jeans, I had only the large discount chains at which to amass my wares. These days, students have not one but three major chains devoted to school and office supplies. One can make a preferential argument for shopping at either OfficeMax (NYSE:OMX), Office Depot (NYSE:ODP), or Staples (NASDAQ:SPLS), but do any of the three have an edge when it comes to possible inclusion in one's stock portfolio?

From a sentiment perspective, it looks like OMX shapes up to be a potential bullish choice, while SPLS might be an option for the bears. These stocks have earned respective Schaeffer's Equity Scorecard ratings of 7.0 and 3.0, respectively, suggesting that OMX is likely to move higher during the near term, while SPLS is expected to skew toward the downside.

Options players are notably bearish toward OMX, as evidenced by the Schaeffer's put/call open interest ratio (SOIR) of 1.24, which is just one percentage point shy of an annual peak. The SOIR reading on ODP is similarly extreme, in the 99th annual percentile as well. On SPLS, however, the speculative crowd is firmly in neutral territory, illustrated by a Schaeffer's put/call open interest ratio (SOIR) reading of 0.69, which ranks in the 55th annual percentile.

Short interest is hardly worthy of mention on any of these names, although it is notable that SPLS has the lowest short-interest-to-float ratio of the trio, while OMX shoulders the lowest short-interest ratio. Where opinion really differs among the office-supply retailers is on Wall Street. SPLS has garnered a nearly unanimous bullish opinion, scoring nine "buy" ratings against a solitary "hold" and no "sells." OMX only has two analysts following it, however, while ODP boasts just three "buys" alongside six "hold" and "sell" designations.

One might look at these analysts' ratings and naturally conclude that SPLS has turned in the superior price action of late. But in fact, SPLS has drifted lower since early May and is currently fighting with resistance from its 10-week and 20-week moving averages.

In July, SPLS violated long-term support from its 20-month moving average, enduring its first monthly close beneath this trendline since October 2002. While the shares have edged back above their 20-month, the 10-month still looms overhead.

Turning to OMX, which is more attractive from an Expectational Analysis (R) standpoint, the stock has spent the past several weeks consolidating toward its 20-week moving average. The shares responded with vigor to the firm's first-quarter earnings report on April 27, surging nearly 20 percent during the final week of April. OMX has slowly built upon this move higher and is gradually digesting these gains.

The stock's recent strength has catapulted it toward the 44 level, above which OMX has been unable to solidly break in more than a decade. Technical analysis has taught us that the more frequently a resistance zone is tested, the weaker it becomes, rendering a breakout more likely. OMX shares have been needling at this level since May; any inflows from the sidelines could be the impetus needed to send the stock surging through.