Speculators have run Staples, Inc. (NASDAQ:SPLS)

January 12, 2015, 12:35 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Speculators come into stocks for all kinds of reasons, and hedge funds love to take big positions in beaten up companies and then bring in the speculators too, they used a call this pump and dump, but in today's market situations like that are less obvious than they used to be.

I had always thought that with even slight improvements to their stores sales at Staples, Inc. (NASDAQ:SPLS) would increase dramatically, so I write this with mixed points of view.  I am hopeful, but there is nothing compelling about Staples as an investment here.

The growth rate for SPLS has been awful, and that is not expected to change immediately.  We track trailing 12 month EPS and exclude 1-time events to focus on growth from operations.  Then we compare that Y/Y to plot yearly growth every quarter over time.  Our yearly EPS graph below shows us that EPS growth declined by about 20% in Q1 and Q2, and by 14.53% in Q3 2014.  That's awful!

Clearly I do not need to delve deeper into Earnings growth, but there is a monkey in the room that needs to be discussed.  The stock has surged, but not as a result of operations.  The stock price increase happened as a result of M&A speculation.  The problem is I do not know many firms that will pay up significantly for declining EPS like that.

However, the stock increased from about $11 to $18 in a few short months, and the P/E is now 17x, higher than at any other point since Q1 2011, and from there in 2011 the share price tanked. 

Technical take:

According to our real time trading report for SPLS (SPLS report) the stock just tested our longer term resistance level.  Technically this would make SPLS a short candidate with longer term resistance as risk control.   Our downside target would be longer term support by rule.  This would remain true only if longer term resistance remains intact.

Summary:

Speculation is the only thing driving shares of SPLS at this time, fundamentally the company looks horrible, and that even makes the hopeful M&A rumors questionable.  In addition, from a trading perspective the stock has just tested longer term resistance and that makes it a better short than a buy in our opinion.  The 50%+ run that has already happened may stall if this resistance level holds.

Disclaimer:

Stock Traders Daily provides trading strategies, which by definition incorporate risk controls, and it has only engaged in buy and hold strategies twice since the turn of the century.  The first was in October of 2002, and those buy and hold strategies lasted until 2006, and the second was in February of 2009, and those buy and hold strategies lasted until the end of 2010.  Every point in between Stock Traders Daily has been providing risk controlled strategies, market based strategies, and strategies for approximately 3000 individual stocks, which are unbiased and which incorporate the notion that short term gains lead to long term success.  There is a time and a place for buy and hold strategies and this is neither the time nor the place for that approach in our opinion.  Risk controls are essential.

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