Should You Imitate the Insider Purchase at This Grocery Store?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Safeway (NYSE: SWY) senior vice president David Bond purchased 5,000 shares of the company’s stock on July 22, according to a Form 4 filed with the SEC. The filing now places Bond’s direct holdings of the grocery store at about 31,000 shares, in addition to about 5,500 shares in his 401k.

According to Insider Monkey’s analysis, stocks bought by insiders tend to narrowly outperform the market in the future (read our analysis of studies on insider transactions) and this makes sense since insiders should be unlikely to buy shares unless they are confident in the company’s prospects (otherwise they would instead choose to diversify their wealth and reduce company-specific risks).

Taking a closer look at the company

Safeway is off its highs for the year, but is still up about 40% since the beginning of 2013. This has placed its market capitalization at $6.1 billion, or 12 times the company’s trailing earnings. The company recently reported that despite lower sales, it managed to increase its margins with the result being that income from continuing operations was about 20% higher than a year ago.

The current valuation is low enough that even low growth from Safeway going forward could make it attractive, though of course, the apparent strength of the company’s recent results come from shedding less lucrative operations and so, improved earnings might not be sustainable. Wall Street analysts do expect a small decrease in adjusted earnings per share next year, for a forward P/E of 13, and many market players are bearish on the company with over 20% of the float held short.

In addition to insider activity, Insider Monkey also tracks quarterly 13F filings from hundreds of hedge funds and other notable investors. We’ve found that the information in these filings can be useful in developing investment strategies (for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and also for tracking interest in individual stocks over time. According to our database, billionaire Ken Griffin’s Citadel Investment Group owned 2.8 million shares of Safeway at the end of the first quarter of 2013 (see Griffin's stock picks).

Comparing Safeway to its peers

Other grocery stores include Kroger (NYSE: KR) and Supervalu (NYSE: SVU). Kroger has been growing modestly, going by recent reports, and it too is priced close to value territory with both the trailing and forward earnings multiples coming in at 13. Kroger’s same-store sales have been increasing only slowly, but good results have allowed management to increase the internal earnings guidance for the current fiscal year.

It’s also positive that Kroger continues to generate growth by appealing to its customers (as shown by the increase in same-store sales), which should prove a more sustainable source of earnings growth than increasing the number of locations or improving net margins. As long as management can continue light growth in same-store sales, with potentially continued share buybacks as a result, it could be interesting at that earnings multiple. It is valued at a considerable premium to Safeway in terms of EBITDA, however, with a trailing multiple of more than 6x to Safeway’s 5.2x valuation on that basis.

Supervalu is up strongly after selling off a number of its store brands to private equity. In theory, management should now be better able to focus on the company’s remaining assets although we wouldn’t want to depend on that as the core of a long thesis. Supervalu is expected by the sell-side to earn a profit next year (compared to weak numbers on a trailing basis, with adjusted earnings numbers underperforming consensus in the three quarters prior to the previous one), with a forward P/E of 13. However, many market players think that bulls have overreacted to the company’s good news and so, over 20% of the float is held short.

Conclusion

From a value perspective, investors seem wise to concentrate on Kroger or Safeway as potential picks (and possibly Supervalu if that company starts to look on track to hit EPS targets for next year). These companies would have to continue growing their earnings in order to be value plays, but recent financials suggest that is at least possible.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

 


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure