While many retailers have faced their share of problems in recent years, the office supplies retail segment has taken the brunt of many negative trends. Businesses and consumers alike have become much more adept at buying supplies, often going around the brick-and-mortar behemoths. But now things may have finally reached a point that the sector is becoming safe.

A fresh upgrade this week on Staples, Inc. (NASDAQ: SPLS) may seem like the best catalyst of all. The reality is that this “basing out” has been underway for some time and there is a massive value proposition here if Staples and Office Depot Inc. (NYSE: ODP) manage to get their acts even remotely together while they restructure and right-size their operations — code for closing the proper number of stores.

What is interesting is not just that Credit Suisse’s Gary Balter raised Staples to Outperform from Neutral on Monday, nor just that the firm assigned a $15 price target. Balter’s upgrade was essentially based on a proposed Staples and Office Depot merger, an armchair activist’s suggestion.

READ ALSO: Does RadioShack Really Have a Guardian Angel?

What 24/7 Wall St. would prefer to do is to assess this office products retail space on a standalone basis. Our take is that there are no assurances that the suggested merger would pass regulatory hurdles, even though times have changed from a decade ago, and even if the report suggests that regulators would approve a deal like this now.

Back in May we showed how the news flow out of and around Office Depot may have signaled that the worst seemed to be over for it (and maybe even for Staples too!). The catalyst was news reactions and analyst upgrades. Guess which firm was among those that had raised Office Depot’s analyst rating prior to that report — Credit Suisse, and with a $7 price target. Office Depot shares were under $5 at the time, and they were up around $5.72 on last look after this pop. Staples’ stock was trading around $12.50 at the time, just a tad under the $12.75 current price.

Balter said in his report:

We believe that a merger of the remaining office supply superstore chains, Staples and Office Depot, makes significant financial and operational sense, and in this note we detail why. We are upgrading Staples to go along with our Outperform rating on Office Depot, because we believe the math is so compelling and the current Staples valuation leaves limited downside, in our opinion, even if nothing happens.

READ ALSO: 10 Brands That Will Disappear in 2015

The good news is that Staples and Office Depot shares have both come off of their post-upgrade highs. Why this is good news is that “proposed merger ideas” should not necessarily create catalysts. The uncommon value propositions should be what matters more here. Again, there would be no assurances that a deal would be allowed — and if the analyst’s firm was involved in trying to get a deal done here and the analyst wrote about them, there would be a serious problem.

Office Depot shares were barely above $5 before the Staples upgrade and proposal of an armchair deal. A move up to $5.69 in Office Depot shares by Wednesday afternoon may simply be too much. That being said, the consensus price target for Office Depot is up around $6.20, and the highest price target is $8.00. Office Depot is valued at about 16 times next year’s consensus earnings estimates after this run-up, but it trades at single-digit multiples of some analyst estimates for the year 2016 after its restructuring and Office Max merger synergies have kicked in.

Staples trades at only about 13 times next year’s earnings expectations, and the move up to $12.85 compares to a 52-week range of $10.70 to $16.67 and to a consensus analyst price target of $11.25. Credit Suisse’s $15 price target is now the street high.

Chasing stocks after an upgrade of this sort can be a very risky proposition. That being said, long-term investors may start to revisit these companies after the dust settles based on long-term value propositions. We would shy away from evaluating these on another merger wave, and of course we would remind readers that this is still will not exactly be a growth sector inside retail any time soon.

READ ALSO: 4 Chip Stocks to Buy That Don’t Need PC Growth for a Strong Finish to 2014

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.