I arrived at Staples as a subject for analysis by a different route than that I normally take. SPLS has the highest options sizzle index today of any Russell 1000 stock averaging 3 million or more shares a day.
A sizzle index is constructed from a five-day moving average of volume. If the current volume is at the average, then the sizzle index is 1. If 50% above the average, then the index is 1.5, and 30% below the average, the index is 0.7.
All the sizzle index tells us is that the stock is in play, and although an index can be calculated on the stock volume, I prefer to use the options index because options traders tend to be more attuned to what's happening now compared to stock traders, who tend to have a long-term horizon.
The SPLS options sizzle index presently stands at 25.4, meaning the volume is more than 25 times the average volume of the last five days. The greater amount of the the volume, by far, is in call options, which have an index of 32.2, compared to a put sizzle index of 4.1.
The SPLS chart is anything but bullish. After recovering almost entirely from a recession low, the price began to tank in March 2010 and by 2011 was trading below the low point of the recession.
The most recent leg down began March 27 from $16.86 and hit a swing low of $12.94 on May 21. From that point, following an 11% upside earnings surprise, the stock retraced up to $13.70 on May 23 and has since fallen back to a low today of $13.15.
The price bounced sharply of of today's low, reaching $13.31 at one point, a 1.2% gain in one hour, before pulling back yet again. So there is clearly something going on with SPLS that has just now begun to show on the chart.
If the rise should continue, I would consider persistent breaks above $13.70, $14.25 and $15.24 to be buy signals, depending upon the trader's degree of caution. A fall below $12.94 -- a lower low -- in my book would negate SPLS as a potential trade.
The analyst consensus on Staples is neutral. It's not expected to outperform or underperform the market.
The company has return on equity of 14%, a respectable level, with a moderately low level of long-term debt, amounting to 29% of equity. Institutions own 90% of the shares, and the price is bargain basement -- it takes just 37 cents in shares to control a dollar in sales.
Earnings are strongly seasonal, peaking in the 3rd quarter and then trailing off. The Q3 earnings were higher than the year ago in both 2011 and 2012.
The company has been profitable all quarters since the 2nd quarter of 2010. In that period, seven quarters have shown upside earnings surprises, and four have surprised to the downside. The peak 3rd quarters have all shown upside earnings surprises.
So this is a company whose finances I could like it looks solid on the books.
The downside is that it does business in Europe, and Europe is a mess embroiled in a tub of conventional wisdom that says, repeatedly and loudly, that it's going to get even messier.
Also, Staples is a business supply company, and if Europe drags the rest of the world down with it, the business of supplying business will be hit especially hard.
I don't usually trade based on a news, but the Europe thing is so pervasive, it has to be taken into account. A trader who believes Europe is likely to go under will not touch any trade in SPLS and indeed is probably moving away from stocks. A trader who finds it unthinkable that the really smart people who run Europe will let the Euro project fail will see SPLS as a great bargain.
The heavy call options volume, I presume, come from traders and speculators who stand firmly in the second camp.
SPLS has an adequate selection of option strike prices with fair open interest and narrow bid/ask spreads.
Implied volatility stands at 35%, slightly above the middle of the six-month range, and has been rising gently since mid-May. Options traders are pricing in a 68.2% chance that the stock will close between $11.92 and $14.58 a month from now, for a maximum gain or loss of 10%.
Staples next publishes earnings on Aug. 15. The stock goes ex-dividend in June for a quarterly payout yielding 3.32% annualized.
Decision for my account: I would consider a bull position in SPLS upon a break above $13.70 on higher volume. If the volume isn't there, I wouldn't touch it. The dividend yield is high enough that I would consider shares rather than options as the vehicle of a trade.
I'm not trading now, however, for reasons intrinsic to my account -- I'm fully committed at this point. Also, this is the first time I've used the sizzle index to select a stock for analysis, and I want to see how it plays out before committing funds.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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