David Dreman
Adding Office Depot To Garcia Value Fund
I have been looking at Office Depot (ODP) for quite a while, but didn’t quite get to digging into the numbers, until now. The stock is down more than 50% from its 52 Week High of $37.I believe Office Depot is a case of investor overreaction.
Office Depot is part of the fragmented office supplies business in which Staples (SPLS), Office Max (OMX) and Office Depot control a small percentage of the entire industry. Below is a quick look of some numbers I looked at.
| Market Cap | 3.85 Billion |
| Enterprise Value | 4.29 Billion |
| P/E (ttm) | 7 |
| P/BV | 1.28 |
| Return On Equity | 18% |
| EBITDA | 986 Million |
| EV/EBITDA | 4.353 |
| Operating Cash Flow | 489 million |
In addition to great fundamentals, Office Depot also appears as a magic formula stock. According to Magicformulainvesting.com, Office Depot currently has a pre-tax earnings yield of 16% and pre-tax return on capital between 25-50% . The screen used was top 100 stocks for companies with a minimum market cap of 2 billion.
Unfortunately, the GVF has no cash on hand and again I will have to make some sacrifices. The unfortunate ones are Accenture (ACN) and Aeropostale (ARO). Aeropostale has had a nice run since I bought it when it appeared on the 52 Week low list. In the case of Accenture, I am simply switching from a so-so opportunity to a great opportunity. I want to stay fully invested at or near market bottoms, so I will be adding all available cash to Office Depot.
Disclosure: I have no position in Office Depot (ODP)
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Tags: Magic Formula Investing Discussion
4 comments for “Adding Office Depot To Garcia Value Fund”
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we’ve been looking at ODP as well. It came on our radar as we started to look for companies where depreciation is over-stated (see our borders theory for an an example).
nfi
A comment, and then a question:
Comment: Isn’t screening only for $2 Billion companies and screening for a list of 100 sort of manipulating the true Magic Formula screen? My recollection is that Greenblatt ran his testing only the top 25 stocks with a $50 Million screen. That sort of screen almost invariably results in stock with double digit earnings yields and 75% to 100%, or greater than 100% pretax return on capital.
Question: Why does Greenblatt exclude financials from his screen? Utilities too?
The 50 million dollar screen is the main study in greenblatt’s book, BUT he does mention the formula works for all sizes (large,med,etc.)
I have not looked into the financial situation but I believe its due to the effect interest rates have on their performance. Ironically, Ben Graham recommends avoiding financials.
[...] As a matter of fact, Chou mentions Office Depot. Sounds familiar? Not to brag but…… I I wrote about Office Depot wayyyy back on February 24. Anyone reading this blog at the time could have researched the company, watch the stock plummet 20% [...]