Safeway: Rotten Apple or Pick of the Crop?

There’s a supermarket anomaly near my home. Two supermarkets, a block apart: King Soopers (a Kroger store) and Safeway. In my town, everybody shops at King Soopers. Safeway is deserted. There are literally more employees than customers. Consequently, I get tremendous prices at Safeway, including a large percentage of my groceries at 50% off.

What’s up with that? For some reason, Safeway has made the corporate decision to keep the store open as a loss leader. Curious.

They stock all the normal foods, but then they have to get the food out of the store quickly at 50% off while it’s still fresh and appealing. It’s a massive relief to me as I budget for a household of six people!

How does Safeway stock look as an investment? Is it in financial shambles, based on my local experience, or do I have a warped view of the macro picture?

Safeway (SWY, $16.53) is a North American food and drug retailer, operating about 1700 stores. Sales were $41 billion in 2010, and net income was $589 million — it’s a low margin industry. Large supermarket chain profits tend to grow slowly, so I’m impressed that projected consensus earnings growth is 25% by the end of fiscal year 2013. The price earnings ratio (PE) is 9.7 based on 2011 projected earnings per share (EPS) of $1.70, and the dividend yield is 3.51%.

I like the earnings growth, I love the dividend, and I absolutely hate the share price. I rarely benefit from buying stocks with prices in the teens: I avoid them like the plague.

The stock chart is dismal. EVERYBODY who bought this stock in the last ten years has lost money. Wow. I never buy stocks that are reaching new lows or collapsing from established trading ranges, so this one’s out of the question.

What would I do if I already owned the stock? Well, I guess I’d stop cringing and start selling. It’s easy enough to take that money and put it into a growth stock with a good chart. With a little searching, I could even find a stock with a good chart AND a big dividend. In that vein, Kimberly-Clark (KMB, $69.82) is pretty attractive. You can review KMB on my website, which I wrote about on September 21, 2011.

I don’t look at owning a losing stock as a personal failure. I look at it as a chunk of money, and I say to myself, “Will this chunk of money grow more quickly if I keep this stock, or if I sell it and buy a better stock?” The answer is obvious: sell it and buy a better stock. If you cannot do that, you have too much emotion invested in your stock portfolio. Think of it more like math and less like ego. ALL stock investors pick stocks which go down. Your job as a stock investor is to make decisions which minimize losses and maximize gains. Good luck, and good profits!

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