Category Archives: Supervalu Inc

Sell SuperValu (SVU) at the Market

Posted on January 15, 2010 by | Leave a comment
It is now time to recommend that SuperValu (SVU) be sold at the market. The stock has performed well since the investment observation was issued on January 6, 2010. It is highly recommended that anyone who bought the stock based on Art's insight should re-read the posting. Unfortunately, it was not possible to buy this stock at any price lower than on the recommended date.

SVU's stock price has gone nothing but up since the recommendation. However, in the pursuit of "seeking fair profits" the returns that this stock has provided within the last 9 days say that it is necessary to consider alternative opportunities. The key to investment success and a key principle of economics is to seek the best alternatives.

SVU was recommended when it was trading at $12.81. As of January 14, 2010, SVU was quoted at $14.33. In after-hour trading, SVU was up $0.05 to $14.38. Based on the closing price of $14.33, SVU has gained 11.87%. The annualized return on this position would be 481%. Selling this stock now generates a return of 4.75x greater than the amount of the dividend yield if held for a full year. Additionally, the 11.87% gain exceeds the return on a 30-year treasury purchased on January 6, 2010 by 2.53x (if held to maturity.)

Those not interested in following through with our sell recommendation can feel comfortable knowing that SVU is a great long-term holding with an 11.87% downside cushion since our investment observation.

As we have indicated in the purposes and function of this site, our goal is to:

  • maximize the annual yield of each trade.
  • reduce time between buying and selling of each stock.
  • exceed the annual yield of government guaranteed alternatives in each trade.
Investment observations are intended to be a starting point for investigating a quality company at a reasonable price. It is hoped that after doing the background research you can buy the stock at a lower price. Ideally the stock should be held in a tax deferred account and should not consist of less than 20% of your holdings. Personally, we prefer holding only 2-3 stocks at a time.

Sell recommendations are intended to deal with the short term reality of the market. The tracking of the Sell recommendations are the worst case scenario if you happen to have bought a stock at the time the Investment Observation was made (please avoid making this mistake.) We aim for mediocrity in our returns, therefore we are happy with 9-12% annual gains. However, since codifying this approach to investing in 2005, we have had annual returns of 20% and above every year since.

It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, we would rather leave some money on the table rather than have it taken away from us by the trades that are placed by institutions and market makers. -Touc.

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Posted in Sell Recommendations, Supervalu Inc, SVU

Investment Observation: Supervalu (SVU) at $12.81

Posted on January 6, 2010 by | 4 comments
Supervalu (SVU) has been on our watch list since December 2009. After considerable analysis, I decided to pull the trigger today at $12.81, less than 5% within the 52-week low. My model showed the price of $12 to be the buy range and $15 to be the fair value. The negative earnings on the surface is a concern. However, a deeper investigation shows that the company was forced to take an impairment charge of $3,250 back in January of 2009 because of the Statement of Financial Accounting Standards (SFAS) No. 142 accounting rule. This resulted in a negative earning of $13.95 per share. The quote below was taken from the SEC filing.

For the third quarter of fiscal 2009 the Company’s stock price had a significant and sustained decline and book value per share substantially exceeded the stock price. Consistent with SFAS No. 142, the Company performed an interim impairment test of goodwill and indefinite-lived intangible assets at the end of the third quarter of fiscal 2009. Although this analysis has not been completed due to its complexity, based on the work performed to date the Company has recorded a preliminary estimate of impairment charges of $3,250, comprised of $3,000 of goodwill and $250 of indefinite-lived intangibles.

I recalled that SVU was trading at a 70% discount to book during the March low. After an adjustment, it has a book value of $12.79. I purchased the shares at book value.
Despite the consideration of these adjustments, not all is bright for SVU. The company's operating margin is 3.09%, very low compared to its competitors. A large amount of long-term debt ($8 billion) is a dark cloud that hangs over the company. Large capital expenditure will deplete their cash flow if the economy doesn't pick up. After 35 years of consecutive dividend increases, the company reduced their distribution by 50% and now pays out $0.35 or 2.8% annually. All of these factors contributed to SVU trading at such discounted level.

Forward P/E is at 6.64 times. The price-to-sales ratio is at a low of 0.06. Price-to-book value is at 1. Current dividend yield of 2.8% which exceeds the five year average yield of 2.5%. The current ratio of 1 means that the company can turn over their current assets at the same rate as their current liabilities. This is important for short-term viability concerns.

Fundamental aside, it was the technicals of SVU that prompted me to buy. From the chart below, you can see that for most of 2009 the stock trade within the $17 and $12 range. As business conditions improved and the company returned to profitability in the second half of the year, shares remained unchanged. The stock appears to be "bottoming" as it remains range bound. The moving averages are doing the same as well. A break below $12 would spell trouble and I would get out while a breakout above $17 will signal better times for SVU.
I bought the stock at $12.81 and will sell if it break below $12 (-7%). Profit will be taken around $15 (+17%).
The purpose of our investment observations is to point out quality Dividend Achievers and formers that are near a 52-week low. From this point begins the fundamental research to verify the quality of the stock for both short and long-term investing. These recommendations are within the context of the 3rd year of an 18-year secular bear market. A bear market that we expect could trade in a range between 16,000 and 5,000. The secular bear market will be considered over when the Dow Transports and Dow Industrials exceed their respective peaks on high volume or the dividend yield on the Dow exceeds 6% or higher. -Art

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Posted in Art, Individual Stock, Supervalu Inc, SVU

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