Buy Safeway Puts Before Thursday Earnings

Advertisement

Earnings season officially kicks off tomorrow with Alcoa (NYSE:AA) leading the way. The first week is generally a light one, although some heavy hitters — PepsiCo (NYSE:PEP), JPMorgan Chase (NYSE:JPM) and Google (NASDAQ:GOOG) — dot the schedule.

One company that may not be on many radars, even though it brings in more revenue than Google, is Safeway (NYSE:SWY). The grocery chain reports Thursday before the open, with analysts expecting 35 cents per share. This figure represents a modest two-cent, or 6%, increase from a year ago. The company has averaged about twice that growth percentage during the past four quarters.

The problem with SWY isn’t how it does compared to expectations. In fact, the company hasn’t missed an estimate in the past five quarters. But performance after reporting is an issue, as the shares have dropped an average of 4.6% in just the one day following the past three reports.

Today, while the rest of the market is enjoying a huge up day, SWY is cruising at the breakeven level. Perhaps this underperformance is due to the tag-team resistance of the $18 level and the 50-day moving average, which have conspired to keep the shares in check for the past couple of months. The stock has closed just one day above the declining 50-day since plunging below it after the last earnings release.

The story with “traditional” grocery stores such as SWY and Kroger (NYSE:KR) is that they can’t keep up with the deep discounters that are attracting more consumers amid the continuing slow economy. This is hardly a revelation. But it remains a major problem for grocers who are caught between cheap prices and upscale stores such as Whole Foods (NASDAQ:WFMI). And it’s why SWY is down 22% this year.

Yes, expectations for SWY are low. Sentiment is largely negative with high short interest and just four “Buy” ratings from 20 analysts. But that’s to be expected. And sentiment was bearish in front of the previous three reports, which didn’t prevent price weakness. There’s no reason not to expect more of the same. Buy the Oct 18 Put for around a buck.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/buy-safeway-puts-before-thursday-earnings/.

©2024 InvestorPlace Media, LLC