EDITOR’S NOTE: Sam Collins is out today. Anthony Mirhaydari is providing the Trade of the Day.
Supervalu Inc. (NYSE:SVU) might be a lowly grocery stock, but it looks headed for a major league upside breakout from a two-year-old downtrend as investors warm up to the idea of a pending spinoff of its Save-a-Lot unit.
The remaining company will be leaner, less burdened by long-term debt, and able to focus on the business of wholesale grocery sales — trimming its exposure to the consumer.
The new Save-A-Lot business, which will be publicly traded should a private buyer not materialize, would be free to focus on one of the fastest growing retail segments: Hard discount grocers selling private-label food to cost conscious buyers.
Another dynamic in play has been the loss of wholesale business from the closure of Albertson’s and Haggen stores. But SVU management has been aggressively pursuing new business including the announcement of a distribution deal with The Fresh Market Inc (NASDAQ:TFM) on Aug. 15.
Shares lost two-thirds of their value from their early 2015 high, as results stagnated and investors worried the company was losing its way in a rapidly changing and fiercely competitive industry. But now, with results stabilizing, folks are starting to see the upside to the split.
Shares have spent the year to date stabilizing in a narrowing range between $6 and $4 and are now threatening a break above the 50-week moving average for the first time in more than a year.
A break about three-month resistance near $5.60 would set up a push above $6 and eventually a run at the 200-week moving average near $7.
Buy SVU with a $7 initial price target — a 27%-plus gain from here. I have recommended a long position in SVU to Edge subscribers.