Where September's Stocks Are Headed Next

Things got worse, and after the company missed earnings and delayed filing its required 10Q, the stock has lost 23.3%, compared to a 1.7% decline in the S&P 500.

But I also said, "It looks like a stock that will pay off in the end," and I think the current downturn may have taken the worst out of the stock. I have written put options against the shares (a bet that has lost money), and I now think there are more reasons to be positive than negative.

Think the worst of the housing downturn is over? Office Depot's solid cash flow should make it a safer play than homebuilders or financials. Think small-business tech spending will rise? Office Depot's price-to-earnings ratio is a fraction of Dell's (DELL - commentary - Cramer's Take).

Office Depot could still have some downside, and I don't expect a quick recovery. But at current valuations I can no longer justify a bearish position, so I'm closing out that call.

Delta Airlines

On Sept. 17, I made another bearish call, this time against Delta Airlines. Although the stock looked cheap, after I made some adjustments for earnings quality it looked more like a company recently emerged from bankruptcy (which it is). The stock has lost 17.7% since that call, compared to a 2.1% decline in the S&P.

Short term, anything can happen because airlines have tons of leverage that can lead to wild swings in profitability. But long term, I don't believe the major airlines have any better prospects than they did before the previous 10 or so bankruptcies, and I remain bearish.

Apple

I weighed in favor of the bulls for Apple on Sept. 17, and was rewarded with a 32.5% increase in the shares, compared to the 2.1% loss for the S&P 500. The share gains cut Apple's 3.9% free cash flow yield down to 2.9%, so it isn't the value it was then.

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At the time of publication, Trent was long Adobe and had written naked put options against the shares of Office Depot, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.