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Mea Culpa! I Was Wrong About This Stock

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

In a list of “50 Unfortunate Truths About Investing,” Fool.com contributor Morgan Housel wrote two truth that made me pause for a moment and consider their gravity.  He rightfully noted that “There is virtually no accountability in the financial pundit arena. People who have been wrong about everything for years still draw crowds.”  He went on to say that, “The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn't -- his are much bigger”

In doing some soul searching I went through some of my less than stellar works and noted one that really fit the mold of what Morgan was referring too.  I was flat out wrong in my analysis of the company and my overly bullish stance is beyond repair.  I thought it would prove valuable to run through what went wrong in an effort to learn and hopefully not make the same mistake again.

Moneyballing

More than six months ago I publically wondered if SUPERVALU (NYSE: SVU) lived up to its name.  I thought this was a deleveraging story that had the potential for some supersized returns.  In fact I actually envisioned a future where SUPERVALU’s shares tripled in value if not more.  I couldn’t have been more wrong.

Since that call shares have plummeted 60%.  Along the way they reported deteriorating sales, sacked their CEO, eliminated the dividend and finally put the company on the auction block.  The company simply could not deliver a turnaround that was necessary after they took on too much debt in a growth by acquisition binge. 

What Went Wrong?

What I missed was that while the company was busy deleveraging they were not reinvesting in their business.  Turns out those old stores are not somewhere that consumers actually liked shopping and this hurt margins which were crimping their ability to deleverage.  They tried running sales but all that did was crimp margins further which put the deleveraging story in more trouble.

That theme was silently playing out in the bond market as bondholders who had been valuing the bonds if they’d be made whole changed their tune.  These bondholders showed their concern by selling off their holdings which further weakened the thesis as it would make it harder to refinance their big 2016 debt maturity.  Now that the company is on the auction block investors will be lucky to recoup any of those losses.

Marginal Performance

Grocery stores are a low margin business and when you’re the lowest of the low and you’re weighed down by debt it makes it nearly impossible to keep up.  Take a look at the EBITDA Margins of SUPERVALU when compared to the following peers: Kroger (NYSE: KR), Wal-Mart (NYSE: WMT), Safeway (NYSE: SWY) and Whole Foods Market (NASDAQ: WFM):

SVU EBITDA Margin TTM data by YCharts

Traditional grocery peers Safeway and Kroger have a low single digit EBITDA margin but it still gives them the flexibility to reinvest in the businesses, maintain a solid balance sheet and return excess cash to their shareholders.  Meanwhile, top retailer Wal-Mart and high end grocer Whole Foods had margins nearly twice their traditional peers which afford even more financial flexibility.  Over at SUPERVALU their EBITDA margin fell off a cliff in 2011 and it hasn’t recovered.  They simply haven’t had enough cash left over to pay down their debt and reinvest in the business to compete with these higher margin peers. That’s really the culprit behind this busted thesis and one that’s not likely to be repaired any time soon.

Bottom Line

SUPERVALU is one of those tantalizing turnaround stories that simply never turned around.  Not only did I get this one wrong but I waited far too long to admit it. I plan on making it a point to review my work each month to see if there are any looming mistakes I can rectify before they become as big a mistake as SUPERVALU.  That accountability should provide more insights and value than the saving face that would have been gained by simply ignoring the existence of a bad call.


latimerburned is long January 2013 $10 Calls on Supervalu. The Motley Fool owns shares of Supervalu and Whole Foods Market. Motley Fool newsletter services recommend Supervalu and Whole Foods Market. 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!

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