Surviving Staples in an Amazon World

NEW YORK (TheStreet) -- When the dust settled after the closing bell on Thursday, Staples (SPLS) shed about a billion dollars in market valuation from the close on Wednesday. If you're nearing a point of breaking the glass to push the panic button, you may want to wait a little longer.

Staples shares are down almost 28% for the year to date as of Friday's close of $11.48.

Thursday's and Friday's fall didn't break through any significant support levels because there is none. I can find a support trend line on a weekly chart, but otherwise not much to sink your teeth into. The next area of support to watch is $10.50. That's the low made in the third quarter of 2012.

I don't think Staples will re-test the lows and will find support above $11. Current shareholders should consider holding or adding to their position if it makes sense for their investment objectives. If you're considering an entry, there are several ways to exploit the current panic through options.

From my trading experience with gaps down after an earnings miss similar to Staples, investors will see short-term lows by Monday. Friday's open near the low of the day suggests it won't take much time for the market to figure out the first knee-jerk reaction may have more emotion than logic.

Bargain hunters and short-sellers covering positions could push the price up quickly in relation to the gap-down price this week. Looking at the chart, I expect short-term resistance near $12 and again at $12.60. Round numbers often attract like a price magnet and repel, causing a lot of trades in the area. The $12 level may take some time to break above, so if you're hoping for a fast recovery you may have some disappointment.

Not that it's a consolation, but Amazon (AMZN) and Wal-Mart's (WMT) Sam's Club have ripped apart many other competitors much worse. Closing stores is a step in the right direction and building its online sales channel places Staples on a level playing field with Amazon and others. Amazon does mail order exceedingly well, but the efficiency differences among the companies is small enough that marketing and strategic planning are the deciding factors.


SPLS Short Interest Chart

I was attracted to Staples' dividend before the earnings release and now more so for several reasons. The yield is much larger now after the share price went on sale. Also, my overall risk is lower for the same amount of dividends. Perhaps the most salient reason is short-sellers are now paying proportionately more to hold their short position.

When you're short a stock that pays a dividend, you're required to pay the buyer a payment that's known as "in lieu of." In other words, short-sellers will have to pay 12 cents for every share short on the ex-dividend date as if they were the company.

As the shares fall in price, holding a short position can lose its attractiveness quickly as the ex-dividend date approaches. Staples is expected to trade ex-dividend on March 26, a little over two weeks away. As of the latest short interest report, the company has an oversized short interest of over 12%; 647 million shares in the float multiplied by 12 cents is $77.6 million. Take $77.6 million and multiply it by 12% and that comes to over $9 million in dividend "in lieu of" payments to continue a short position past March 25.

Between now and then, many shorts will want to take the money and run. When combined with value buyers stepping up, Staples should be able to put some wind back in its sails. I also think options offer opportunistic risk management while gaining exposure. I pointed out one idea in Real Money Pro that you may find fits your investment objectives to exploit an increase in price.

If you're already long, plan on at least one or two more quarters before the shares see north of $13 again, but if you're averaging in with a long-term hold, this week's decline may prove to be more opportunity than disappointment.

At the time of publication, Weinstein had no positions in any of the securities mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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