Named inside: One of my latest stock recommendations

I continue to get some great feedback on Social Security and the general state of retirement in America … and I want to keep the conversation going because I think this is arguably the most important topic we could possibly discuss as investors.

At the same time, I also want to make sure I continue to cover not just the problems, but also the possible solutions. So today I want to do something that I don’t normally do — talk about a current recommendation in my Income Superstars newsletter.

The reason is simple: I believe this company illustrates all the hallmarks of a classic value investment, and demonstrates that even after the market’s big rally, there are still bargains to be found.

Let me start by asking you a question …

We all know Amazon.com is the biggest online retailer in the world. But who do you suppose is the second-largest?

The answer might surprise you: It’s not Wal-Mart … Target … or some other online-only business.

It’s Staples, the company I want to talk about today.

That’s right. In addition to its huge network of brick-and-mortar stores, this office supply chain boasts the second-largest online business in the world. Yet very few people would ever think that.

The company also boasts about 2,295 stores — with the vast majority in North America but also has operations in Europe, Australia, and South America. Longer term, the company could continue to find plenty of new growth in Latin America as well as Asia. Indeed, it already has deals in place in many countries in those regions, including China.

All told, Staples generates about a billion dollars in yearly profits, on about $25 billion in revenue. And the fact that the company gushes so much cash is precisely why it’s able to pay a solid annual dividend. At current prices, the stock is yielding a bit more than 4% — nearly double the average yield on an S&P 500 stock.

Click the chart for a larger view.

So what’s the problem then? Why isn’t the stock rising with the rest of the market?

Mostly because investors are concerned about a global economic slowdown, which greatly impacts Staples’ short-term business prospects. This worry was only exacerbated by the company’s announcement in September that it was reducing its U.S. square footage by 15% through 2016.

What they’re missing is that Staples ALSO said it would take other cost-cutting measures, better integrate its online business, and work on returning more cash to shareholders.

In my opinion, this is all good news. And with the shares trading at less than eight times next year’s earnings forecast, they are dirt cheap.

Could they get even cheaper from here? Sure, but you don’t buy value stocks and worry about three more weeks of price action … especially not if they’re paying you solid dividends while you wait.

Of Course, There’s One More Reason I Think
Staples Could Rebound Sharply from Here …

I’m not the only person who thinks Staples is undervalued at current levels. In fact, there have been rumors circulating that Staples is an attractive takeover target. But who would want to buy the company if it’s already the leader in its space?

Simple: Private equity firms. They have ample cash at their disposal in today’s low-interest rate environment, and are always looking for situations where they can unlock value that the public markets aren’t recognizing.

Now, any deal of this magnitude would probably require more than one PE firm … which could be one of the reasons a deal has yet to materialize. Negotiations like that take time.

Of course, there’s also another possible reason: Bain Capital is one of the rumored suitors.

Bain, which was co-founded by Mitt Romney, helped launch Staples … and Romney sat on the company’s board for more than a decade. So you can see why it’s entirely possible that an offer would just create too much drama right now.

Again, this is all speculation. But even without the possibility of a buyout offer, I think the stock is worth considering at current levels. I’ve already recommended it in my newsletter, and my father owns 500 shares in his retirement portfolio.

Obviously you should do your own homework before you do anything. However, I think stocks like Staples prove that even in today’s challenging environment, it’s possible to get outsized yields and reasonable upside potential.

Best wishes,

Nilus

P.S. My next issue of Income Superstars is going to press later this week … so if you want to get the latest details on ALL of my current recommendations, just sign up now for a risk-free trial.