SuperValu Still Not Cheap Enough

NEW YORK (TheStreet) -- In the quest for value, we are often confronted by interesting situations that are not quite what they appear to be.

Value investors tend to want to own names that are out of favor, names the rest of the market has shunned, or where there's been a negative reaction to an event or events that have unduly punished that company. Securities can become mispriced when everyone heads for the exits at the same time, and that can present opportunity, especially if the exodus is an overreaction.

We saw many such opportunities during the extreme market events in late 2008 and early 2009: it did take an iron stomach to deploy capital at that time, but there's a laundry list of names that were severely mispriced. A few examples that I could not say no to included Cabela's (CAB), Saks (SKS), Gannett (GCI), Hunstman (HUN), Denny's (DENN), and even eBay (EBAY). But that was an extraordinary time.

These days, the opportunities are fewer and far between, and you've got to be cautious before taking the plunge. Thursday, shares of grocery store name SuperValu (SVU) lost nearly half of their value after reporting a disappointing quarter.

Adding fuel to the fire is the company's plan to be more aggressive in pricing, in an industry that already has paper-thin margins. Not surprisingly, the company also suspended its dividend, and is in survival mode.

Such a precipitous one-day drop begs the question, are the shares now cheap? In my view, they are not. While the company lost a lot of its market cap Thursday, and two-thirds year to-date, market cap alone does not tell the whole story.

SVU data by YCharts

Supervalu also has a mountain of debt on its balance sheet, nearly $6.3 billion; market cap alone is not a meaningful measure here. I prefer to look at enterprise value in such cases, a metric which also includes debt.

In general terms, EV measures the value of the entire firm (in terms of capital structure) and is more encompassing than market cap, which simply measures the market value of a firm's equity but ignores the fact that debt holders have also provided capital to companies.

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