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Staples, Inc. Drops 7 Percent on Downgrade

Office-supply retailer struggles under negative brokerage comments

by Jocelynn Drake (jdrake@sir-inc.com) 11/25/2008 10:50 AM

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Office-supply retailer Staples, Inc. (SPLS: sentiment, chart, options) has dropped more than 7% this morning following a downgrade at Friedman Billings & Ramsey from "market perform" to "underperform." This downgrade goes against the norm for the shares, which appear to be a favorite on Wall Street. According to Zacks, the security has earned 10 "buy" ratings and 2 "holds," leaving ample room for additional downgrades.

What's more, Thomson Financial reports that the average 12-month price target for SPLS stands at $22.96. This target implies that analysts are expecting the shares to rally more than 40% during the next 12 months. Any price-target cuts from this optimistic group could spell trouble for the shares.

Technically speaking, the stock staged a steep decline from its early-August peak of $26.57, losing more than 49% before finding support at the 13.50 region. The equity briefly rebounded shortly afterward, but has since pulled back for another test of support in the 13.50-14 area.

Furthermore, the security is facing staunch resistance at its declining 10-week moving average. SPLS has not logged a weekly close above this intermediate-term trendline since mid-September.

WEEKLY CHART OF SPLS SINCE AUGUST 2008 WITH 10-WEEK MOVING AVERAGE

Overall, it appears that investors have high hopes for another sharp rebound in the shares during the near term. Options players have loaded up on calls recently, betting for a bounce. The Schaeffer's put/call open interest ratio for SPLS stands at 0.85, which is lower than 92% of all those taken during the past 52 weeks. In other words, short-term options speculators have been more optimistically aligned toward the stock just 8% of the time during the past 12 months.

The International Securities Exchange has also reported a growing preference for calls on SPLS. During the past 10 trading days, there have been an average of 5.03 calls purchased to open for every 1 put purchased to open. This ratio of calls to puts is higher than 95.7% of all those taken during the past 52 weeks, underscoring the growing optimism among options players.

Short sellers have also avoided this struggling security. Roughly 21 million SPLS shares have been sold short, accounting for less than 3% of the company's total float. What's more, short interest has been on the decline since reaching a peak of more than 36 million shares at the beginning of August. Despite this flood of short covering, the stock has failed to rally significantly, indicating that selling pressure continues to dominate the stock's technical picture.

Overall, traders should be wary of SPLS. The stock's weak technical performance, matched with lingering optimism from investors, has bearish implications from a contrarian perspective.

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Staples, Inc. Drops 7 Percent on Downgrade

Office-supply retailer struggles under negative brokerage comments

by Jocelynn Drake (jdrake@sir-inc.com) 11/25/2008 10:50 AM

SPLS

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