Thursday, July 12, 2012

Supervalu and the Wayne Gretzky school of value investing

I once wrote a blog post stating why I did not much like small caps. The comments (and there were many) wound up in a discussion of the seemingly cheap grocer Supervalu. This owns Albertsons and others.

I wrote a separate blog post on it - which further explained why I did not like it. The answer came down to thinking about what the business might look like in five years time. Wayne Gretzky liked to skate to where the puck was going to be. Investors should invest likewise - on how the business might look in three to five years time.

We are five months on. The company has suspended dividends and is aggressively cutting price in its shops. They are also having a major review of costs. To quote:

“Given the economic situation the American consumer is in, a lot of grocery competitors are focused on making sure they have the right value proposition for customers. We needed to accelerate our ability to play in that game.”

When your best strategy is getting into a price-war with Walmart the Wayne Gretzky question answers itself.




John

Disclosure: as explained in the original blog post I have no position in this stock, something I now regret.



9 comments:

Sion said...

I guess its worth checking to be clear. What regret is not being short...

Anonymous said...

It's "Gretzky", eh.

Anonymous said...

In fairness, SVU has been cutting price for some time. "Aggressively" is the new term they are using to mean actually getting in line with competition. The equity is a warrant on the company turning around.

John Hempton said...

Spelling fixed. Forgive me - I am an Australian - and - unsurprisingly given our weather - we don't follow ice hockey!

J

Anonymous said...

JH,

Great blog. Noticed you referenced yahoo finance in your SVU post. What resources do you use for investing?

F.S. said...

It is so leveraged (financially and operationally) would you really short even if you think it is going bankrupt? Downside could be huge.

John Hempton said...

No - the leverage and the high short interest is why I did not short it.

The logical thing to short though has always been the debt.

The company is cutting back on its capex - already too low as per the original posts.

It will be a bunch of clapped out stores with lease liabilities when this is over.

The stock had a high borrow cost too.

Never had the pluck to short the debt either - but that trade was FAR better ex-ante.

F.S. said...

I reread your previous post on SVU. Your point on avoiding it was prescient. You also explained well the rationale of not shorting it. However you did say "If perchance the debt were to trade at 70c - implying an EV to sales in the mid-teens - then I might get interested in the debt." Would you say the same thing today? They did just announce asset based funding -- not so good for bonds. A spin-off could also increase the option value of equity and hurt bonds.
Given your current comment: "The logical thing to short though has always been the debt." Bonds maturing 2016 are still trading at 91c. Would you be interested in shorting it?
To me it seems there is not a clear case for short or long. It belongs to the "too hard to tell" pile?

Anonymous said...

James Chanos said it before that people always look at stock price but total capitalization is what is important. A 50% decline in stock price might not make a levered company that much cheaper on a EV basis. I think that's where people got SVU wrong.

YTD SVU stock lost 80%, but EV only declined by 20%.

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