This article is a reprint of my December 19, 2007 RealMoney column.

An Update of My September 2007 Stock Picks

• My picks in September had winners and losers, but fortunately more of the former
• Closing out my bearish stance on Office Depot (ODP)

I wrote six articles in September that included a bullish or bearish stock opinion, and with three months behind them I thought it was a good time to see how they performed and whether any changes were warranted. On the whole, the picks are playing out more or less as planned.

Motorola

On September 10, I wrote that if Motorola (MOT - Annual Report) could get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there Motorola shares would be worth nearly $23.

Instead, the cash flow position has continued to deteriorate, contributing to former CEO Ed Zander’s recent ouster. The stock is down 7.2% since the article was written, compared to just a 0.5% decline in the S&P 500.

Still, I think the issues at Motorola can be fixed by bringing the costs - particularly research, development and overhead - in line with the current revenue generation. Alternatively, activist shareholder Carl Icahn could push to break the company up into smaller pieces that might be acquired for a higher total than the current company is currently able to garner. Either way, I’m sticking to my guns on Motorola.

Yahoo

On September 11 I made a bearish call on Yahoo! (YHOO), saying I didn’t believe in the consensus growth estimates and that Yahoo isn’t generating enough cash flow today to make waiting for the recovery worthwhile — at least not for me.

Things haven’t gotten any better since then, and the stock has lost 1.1% - although that is a slightly better performance than the 1.7% loss in the S&P over the same period. I remain bearish on Yahoo.

Office Depot

On September 12, I made a bearish call on Office Depot (ODP), saying “things are likely to get worse before they get better.” 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 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 P/E is a fraction of Dell’s (DELL).

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 September 17 I made another bearish call, this time against Delta Airlines (DAL). 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 as airlines have tons of leverage that can lead to wild swings in profitability in pricing. But long-term I don’t think 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 (AAPL) on September 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.

Still, the cash flow rose 250% from the prior year, and Apple’s market share remains small for most of its product lines. The company continues to make desirable products, and if I have to take a chance on a tech name surviving an economic downturn it might as well be Apple.

Adobe

My last September stock pick was a bullish call on Adobe (ADBE) on the 18^th. The stock always seems to sell off after a major product introduction such as the Creative Suite launch in May of this year. Investors tend to sell on that news after buying up the shares in anticipation of it.

Although the sell-off wasn’t very pronounced this year, the shares did get stuck in neutral. My own call may have been a bit early, as the shares are down 6.3% since the article and the S&P is only down 4.9%.

On their earnings call, the company reiterated their guidance for next year. As the next product cycle moves closer, I think my bullishness will pay off.

Disclosure: William Trent owns shares of Adobe (ADBE) and has written naked put options against the shares of Office Depot (ODP).

Note: Sign up for cash back credit cards and earn cash back rewards from your daily spending.

William Trent currently has a short position in put options related to Office Depot (ODP).

When I wrote about Office Depot (ODP) in September I said “an investment in Office Depot will require patience and possibly a strong stomach, as things are likely to get worse before they get better.”
Not being one to follow good advice, I wrote put options on the stock.

Good thing I have patience and a strong stomach, as things got worse today.

William Trent currently has a short position in put options related to Office Depot (ODP).

Office Depot (NYSE:ODP) announced that it has delayed its third-quarter earnings release, previously scheduled to take place on October 30, 2007. The delay is due to an independent review by the Audit Committee of the Company’s vendor program funds. The review relates principally to the timing of the recognition of certain vendor program funds.

A little over a month ago I said an investment in Office Depot will require patience and possibly a strong stomach, as things are likely to get worse before they get better. The stock, of course, started rallying almost immediately. Today’s news may test investor’s stomachs.

Disclosure: William Trent has written naked put options against shares of Office Depot (ODP).

William Trent currently has a short position in put options related to Office Depot (ODP).

This article was originally published at RealMoney on Sept. 14, 2007.

I’ve always had a soft spot for Office Depot (ODP), where I served my MBA internship. So when I noticed that a sales and earnings speed bump has put the stock in the 50% off bin, I thought I should check it out more closely. After all, at 10x earnings it certainly looks cheap enough. Its primary competitor Staples (SPLS) has weathered the storm far better but trades at a significantly higher earnings multiple. OfficeMax (OMX) has been hit nearly as hard as Office Depot, but also sports a higher valuation.

That comparison begs an obvious question: is Office Depot cheaper than those companies because it is doing much worse than they are? To some extent this is certainly true, as Staples’ same-store sales have been trending down 2% while Office Depot’s are down 5%. OfficeMax has actually seen positive comps, but that is at least partially driven by having closed more than 100 underperforming stores. At any rate, it seems safe to say the whole group is doing poorly but Office Depot’s lower valuation is at least partially merited by virtue of it doing even worse.

At the Goldman Sachs conference last week, management discussed the impact of a slowing housing market, which has apparently been affecting the home-based businesses that constitute a portion of office superstore sales. The company explained that the change in store sales is strongly related to local housing inventory and the number of days houses stay on the market. Since Office Depot has a larger concentration of stores in Florida and California - two of the hardest-hit markets - this may explain much of the underperformance, and is supported by the fact that the biggest drops have been in the furniture category. However, it also suggests that things may get even tougher for all of the office suppliers as the housing decline continues to spread. Fortunately the international business continues to grow, and accounted for more than 25% of total revenue in the latest quarter.

So that brings me to the financial nitty gritty. Is the valuation cheap enough to merit a long-term investment, or is it still time to stay away from a falling knife? Although net income is still up year-to-date, cash from operations is down - and that dichotomy is often a warning sign. The difference has been working capital investments. Inventory on hand has crept up to 54 days from 52 last year, but receivables are down a bit. It looks like the timing of tax payments was the main culprit, which makes me a little less concerned about the decline.

Even in the face of the downturn, the company has generated $636 million in cash from operations over the last 12 months. The pressure is expected to continue into the third quarter but should start to ease next year, if only because the comparisons will be easier. It used up nearly $450 million on capital expenditures and is expected to continue spending about $500 million annually - mostly on store openings and remodels. I estimate that of that, about $200 million is going to new stores and the rest is required maintenance. Since the new stores are presumably expected to boost future cash flows, the “no-growth” free cash flow stands at about $325 million per year, a 5.8% free cash flow yield on the current enterprise value. It doesn’t take much growth from there to get to an enticing total return.

What’s more, if this worst-case scenario does unfold the company has shown that it has the discipline to act on it. Office Depot has already reduced planned store openings to 100 this year (from an initial plan of 150) and 125-150 next year (from initial plans of 200).

Office Depot has also been buying back shares (although in retrospect they were paying too much for them.) The share count is down nearly 6% from one year ago, and further buybacks will help soften the EPS blow during the downturn as well as provide leverage to the recovery.

All that said, an investment in Office Depot will require patience and possibly a strong stomach, as things are likely to get worse before they get better. It looks like a stock that will pay off in the end, but there are probably some names that will pay off sooner.

William Trent currently has a short position in put options related to Office Depot (ODP).