Shares of Supervalu (SVU) took a big hit last week. This is a stock on our recommended list in the Forbes Special Situation Survey. It is also a stock I own personally. The sell-off had nothing to do with any specific news related to the company. Instead, investors sold the stock in reaction to disappointing results from Safeway (SWY) and the Great Atlantic & Pacific Tea Co. (GAP). Safeway beat earnings by a penny, but missed its revenue target. A&P missed earnings by seven cents per share. On the other hand, Kroger (KR) reported strong results a month ago and the stock rallied in response.
Tight economic times are taking a toll on supermarkets. Food price inflation is prompting shoppers to seek out bargains. They are trading down from name brands to store brands. This may depress revenues, but it should also boost earnings since store brands are more profitable. However, revenues are getting a bit of a boost from consumers who are trying to save money by preparing meals at home instead of eating out in restaurants as often.
Our view is that Supervalu has been unfairly punished for Safeway's and A&P's shortfalls. The stock was already undervalued even before the sell-off. Supervalu will announce fiscal first quarter results on Tuesday, July 22. Those who want to play it safe should wait until then. Those who prefer to take some risk, should buy on Monday.
