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Publication: "The Wall Street Journal"
Publication title: "Investor Bet On Supervalu May Be That"
According to The Wall Street Journal, if you missed out on Supervalu Inc. (SVU) shares during the "grocery rally," you can still pick them up "on sale." While SVU has rallied more than 32% this year, the stock is still trading "on a multiple of just 8.4 times" its 2010 consensus earnings estimates. This is comparatively cheap when you consider that Kroger Co. (KR) and Safeway Inc. (SWY) are trading at 13 and 14 times earnings, respectively.
The Journal believes that most of SVU's troubles are linked to "poor coordination between the corporate and regional levels and an unsophisticated approach to pricing." However, the company has "revamped its marketing and distribution arrangements and invested in better pricing systems." As such, the author believes that SVU could be a solid bet due to both its own turnaround efforts and the recovering economic environment.
The stock has certainly attracted its fair share of detractors amid this short-term rally. Some 8.5% of SVU's float has been sold short, while all 14 analysts following the shares rate them a "hold" or worse. Finally, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.92 ranks above 67% of all those taken during the past year, indicating a negative lean from this speculative group.
The caveat for SVU bulls lies in the stock's long-term boom-and-bust cycle. On three separate occasions since June 2009, the stock has rallied sharply into resistance at the 18 level. On each occasion, the shares have retreated quickly, rebounded into resistance at the 17 level, and extended their decline for heavy losses during the next several weeks.
Currently, SVU is in the midst of the third such pattern; having been rejected at the 18 level on March 12, the shares are now testing resistance at the 17 level. The difference this time around is that the stock has entered a tight trading range between overhead resistance and support near the 16 level (which is home to SVU's 10-week moving average).
If the stock can hang around just below the 17 level long enough, the stock could finally muster the buying strength to break out of this cycle to the upside. The result of such a breakout could produce a considerable rally for SVU, as bearish investors could be forced to buy back their losing positions, creating a potential short-squeeze situation.