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Safeway Down Big on Curious Volumes (SWY)

Posted on | September 5, 2008 Time: 5:03 pm |

I have been a big fan of Safeway (NYSE: SWY) in the grocer space, and was surprised to see shares down 7% this morning on apparently no news. An AP wire just hit announcing a downgrade from Morgan, who puts the new price target at $22 along with an “Underweight” rating. Options activity was heavy, with over 5,000 September puts changing hands at mid-day.

I consider it good advice to generally ignore analyst targets and upgrade/downgrade activity; if anything they seem to be better contrarian indicators than leading ones. In this case, Safeway is just the kind of stock I want to overweight in this environment, not underweight. Shares are now about 11x trailing earnings and 14-15x estimates. Morgan seems convinced that a warning is coming from Safeway management, that comps will suffer because the company has gone too far upscale.

I visit my local Safeway (Vons) every day, and I can tell you that they’re not overly geared towards upscale. Not compared to SUPERVALU, not to Costco (although COST has obvious volume savings), certainly not to Whole Foods. Safeway has a stellar gift card business that should shine again this holiday season.

To get a more in depth view of my thesis, check out my commentary from January that was available on Yahoo! Finance. I also noted the risks in Whole Foods Markets (Nasdaq: WFMI) in my first article on Safeway last summer.

There are certainly risks as the U.S. consumer is being hit from all sides right now. But this stock nearly doubled during the recession of 2001-2002, and looks poised to offer strong returns from here. Other folks may prefer Kroger, but I think Safeway will perform the best of the three (KR, SWY, SVU) non-wholesalers and non Wal-Marters.

Ryan Barnes

Disclosure: Author holds no positions in the stocks mentioned

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