SPLS gets a big buy from Bill Sims at Citigroup

Staples gets a big buy from Bill Sims at Citigroup last friday, he recommended buying the stock before the investor conference on tuesday. Barrons noted the heavy buying of oct 25 calls ( so far more than 4200 have moved). They were $.95 last time I checked with the stock at $25.67. If it moves up to $27 as he predicts your $95 will likely turn into $215-240. I like the risk/reward here, I think I'll pick up a few. Watch your time value here though, if it stays flat or worse you're gonna lose your investment rapidly.
Here's a link to the Barrons article, I don't know if it's a subscriber only but if so let me know and I'll post it.

Staples Options Could Be a Smart Bet
OFFICE SUPPLIES ARE NOT EXCITING. But when those items are sold through an international retail network with burgeoning growth expectations, it could be excused, and perhaps even understood, if a man was inspired to use strong language.

Bill Sims, who follows Staples for Citigroup, is such a man. He is "strongly recommending" that his clients buy Staples stock before Tuesday's investor conference in Boston.

It's not clear if any stock investors affirmatively responded to Sims' exhortation in his Monday research note, but options traders certainly did. The day after his report was issued, 4,201 Staples options traded, the second most active day in the past two months, paling in comparison only to when 7,743 contracts traded on September 27 just before the note was issued.

The greatest number of outstanding positions are in Staples' October 25 calls, which will increase in value should the stock advance beyond $25 on investor day news. The October 25 calls are a cheap way to speculate. For $95, the calls control 100 shares of Staples stock that otherwise cost $2,567.

This year, Staples stock has lagged other retailers because investors have questioned its long-term growth potential. Sims thinks that perception will change at the investor conference. If that happens, perhaps Staples stock will break out of its $23-to-$26 trading range, and finally push past $27.

"We believe that investors are going to walk away convinced that Staples is a long-term sustainable growth story with much greater sales and profit opportunities than anyone would have imagined, in all three segments of their business," Sims advised clients in his note.

Staples stock was recently down 66 cents, or 2.5%, at $25.67.

While Sims has identified "four drivers of our high conviction recommendation" -- including North American sales growth, European operating margin expansion, retail trends, and the prospect of a minimum of mid-single-digit square-footage growth -- his stock call is based on faith.

"Regardless of the sustainable momentum Staples is likely to see for the next several years, our conviction in this call is driven by our increasing confidence in Staples' management team," Sims said in his note.

He recently spent a day with Staples' president and chief operating officer. "Mile Miles is smart, personable and candid," Sims explained. "Mike represents the best of the Staples' management team, free of arrogance and airs. How does this translate into an investable idea? Staples provides what every investor wants. Transparency."

Even in the era of "Reg FD" -- enacted by the Securities and Exchange Commission to standardize transparency in the securities market -- Sims said Staples' transparency should equal a higher stock price.

"They tell it like it is and they don't sugar-coat issues when they arise. For this, you pay a premium multiple. Yet today, Staples trades just barely above a market multiple," Sims added.

But in the options market, where speculators routinely wager on future stock prices, there is a distinct lack of enthusiasm for Staples. Even though speculators are betting on an investor-conference rally, options prices suggest the stock is less likely to advance than normal.

The implied volatility of Staples' October options are 26%, indicating the perceived probability the stock will move up, or down. This implied price movement is less than Staples' historic volatility of 28%. The pricing discrepancy underscores the trading opportunity.

For the longest time, options traders were considered contrarian indicators. When they bought, it was generally a sign to sell. This is one reason that so many floor traders have retired as millionaires at relatively young ages. The reason for this contrarian signal was because options trading was historically dominated by individual investors who had no real insight into what they were buying aside from assumptions and instincts. Now, in an era when electronic markets have improved the quality of the options market, hedge funds and portfolio managers, use options for all sorts of reasons -- including speculating. So even though the majority of Staples options suggest the stock isn't that likely to make a move, the surge in the October 25 calls suggests otherwise.

Staples' stock is up about 13% in 2006. Mike Baker, who follows the company for Deutsche Bank, said the stock has missed much of the recent rally in the retail sector. He has a $30 price target.

"Risks are primarily macro-related," he said in a Wednesday note, "including a potential slowdown in business spending, employment trends and higher paper prices. In addition, we note competition from (Office Depot) and (OfficeMax), among others."