Is it time to buy shares of Supervalu (SVU) or is the stock too far gone? The nearly century old grocer is the third largest food retailer in the USA behind Kroger and Safeway. However, Supervalu shares fell by almost half the other day after the company reported extremely poor fiscal first quarter earnings. It may be too late for the company to turn itself around but not too late to buy shares of Supervalu. The company could put itself up for sale or break up its business into smaller segments. Both of these strategies could provide greater value to shareholders. Investors might want to consider buying calls on the company as a means of hedging risk. Those who already own the stock might consider buying puts on the stock to keep their position but protect against further downside movement. To buy shares of Supervalu now would be a good stock investment if the company turns itself around, gets a handle of costs, and secures its market against competition.
Supervalu evolved from a dry goods store in Minneapolis that opened in 1870. It did not sell groceries until the 1920’s and only changed its name to Supervalu in the 1950’s. It runs more than two thousand food/pharmacy combination stores and has nearly nive hundred in-store pharmacies. Supervalu also is the distributor for more than two thousand additional grocery stores. It franchises Save-a-Lot and Cub Foods as well. This is a company that used to show up on the list when one asked what are safe investments ? When the Supervalu balance sheet started looking bad back at the start of 2011 it closed nearly two dozen underperforming stores. Cost saving measures have not been enough to prevent red ink on the bottom line for Supervalu and the stock price has fallen badly.
Supervalu was a $45 stock in the summer of 2007. The company has paid dividends routinely since the 1980’s. However, a combination of the recession and intense competition from the likes of Krogers, Safeway, Target, and Walmart has taken its toll. Supervalu started the year above $8 a share. Fell to $4.06 a share at the end of June and rose back above $5 a share before its recent fall. Anyone who thought to buy shares of Supervalu after its low in June did well, providing that they sold again before the recent drop in price.
Buying or Selling Down Stocks
Investors will buy shares of Supervalu if they believe that changes made by the company will bring the stock price back from the brink of oblivion. Those who think that efforts by Supervalu are too little and too late will sell and get out. However, as we mentioned above, buying options on Supervalu stock gives investors the opportunity to protect the value that they have in the stock by purchasing puts. It allows them to benefit from an advance of the stock by purchasing calls. As always fundamental analysis is of utmost importance. The stock needs to hold intrinsic value if long term investors are going to own it. It needs to have a margin of safety to survive the current troubles. Investors should do their own research and only buy shares of Supervalu or sell them if they are clear about what they are doing and why.