Tim was the first one to take advantage of my ‘get your chart read’ link over in the middle column. He asked for my thoughts on OfficeMax’s chart. He’s looking to short it based on the news of a delayed earnings report, their CFO quitting and an ongoing fraud investigation, which has caused another gap down in its chart. On the surface that news certainly makes OMX sound like a great short candidate but after digging a little deeper into the story I’m not so sure. For what it’s worth, here’s what Lehman had to say about it on December 21, 2004 (via Briefing.com):
OfficeMax: view the sell off in shares as an over-reaction – Lehman (OMX) 31.13 : Lehman out on OfficeMax noting recent weakness in OMX shares relates to 1) an internal investigation over vendor claims of falsified records on $3.3 MM of sales (over 2 years), and 2) implications of the investigation postponing an expected $775 MM to $815 MM share repurchase. While the company is very tight-lipped on the nature of the vendor claim, the firm views the sell off in shares as an over-reaction. They note a) the investigation is internal and is not an SEC or DOJ investigation and b) the sales in question represent less than 1/20th of 1% of annual revenues (less than 1/40th of 1% over a 2-year period). Firm’s new 2005 estimate is $1.70 and 2006 estimate is $2.00. Importantly, the risk to the EPS estimates is on the upside if OMX eventually moves ahead with share buyback plans. Reits Overweight and $37 tgt.
As for the chart, it shows plenty of bad news has been baked in for a while (see the October and December drops). It looks to me like the sellers may have exhausted themselves, if only temporarily. I’ve never liked chasing shorts because they can snap back so viciously. Today’s hammer is showing me that OMX has that potential. There are a couple of resistance levels above that I’d look to use as entry points for a short position. The first being the $30 area and the other being that October – December trendline. Having said that, I certainly would not want to be in this, long or short, when the results of the investigation are released. I could see a big move, in either direction, depending on the news.
(Although I talk a lot of smack about fundamental types looking at news & financial reports, etc., I often look at the story behind big moves like OMX has had. I just like to check that there’s not something that would cause me to go against what the chart is telling me.)