SuperValu Is About to Spoil

NEW YORK (TheStreet) -- If you're a current SuperValu (SVU) investor, Wednesday's earnings release must have you feeling like you invited friends over for a grill out only to find your dog jumped up on the table and stole your steaks. If you haven't already panicked out of your position, you likely will find Supervalu bouncing back later in the week.

SVU Chart SVU data by YCharts

Grocers Supervalu, Kroger ( KR) and Safeway ( SWY) have sat in the reduced-for-quick-sale bin for the past three years or longer. One grocer standing apart from the pack is Whole Foods Market ( WFM).

Wal Mart Stores ( WMT) and Target ( TGT) are not strictly grocers, however, they aggressively compete in the space. Along with Whole Foods, Wal-Mart's stock has enthusiastically appreciated in the last couple of years.

SuperValu has lost about 24% of its marketcap from Wednesday's close. The loss in market cap is the result of the company announcing a suspension of the nine cents a share dividend, an earnings miss, and hiring Goldman Sachs ( GS) and Greenhill ( GHL) to look for a buyer of the company.

Once in a blue moon, a "Hail Mary" pass with 3 seconds on the clock from 67 yards to the goal will land just right to win the game. Basically this turkey is cooked with no hope other than a distant "Hail Mary" pass completion to find a buyer.

No one in their right mind will buy this company under current conditions. Add in Obamacare obligations around the corner in 2014, and any hopes for a profit are gone. Without a reasonable chance to find a buyer of the operation, the only thing left is to keep the doors open or sell assets for 10 cents on the dollar.

Goldman Sachs probably will have an easier time selling the lotto tickets in the customer service booth in the stores as an investment idea vs. selling the entire chain of stores. Lotto tickets probably have a better chance of paying off too.

Unfortunately for investors, the situation is melting faster than an ice carving on the Las Vegas strip. SuperValu is running low on cash for things like payroll and other expenses. To address a possible liquidity crisis, SuperValu is replacing their senior credit facility with an asset-based lending facility (now lenders are demanding hard assets like real estate for loans), dropped the dividend (management should have dropped the dividend before now), and cutting back on store capital expenditures.

Dividend investors who bought SuperValu to collect the fat dividend will hit the bricks by the weekend with a new lesson learned; sometimes it doesn't pay to chase yield.

SuperValu already was trading below the widely followed 200-day moving average, adding fuel to the liquidation based on chart technicals. Revenue is trending down in much the same way as the stock is falling.

SVU Revenue Per Share TTM Chart SVU Revenue Per Share TTM data by YCharts

Earnings appears even worse than revenue with large per share and over all losses in the last four years.

SVU Earnings Per Share TTM Chart SVU Earnings Per Share TTM data by YCharts

Safeway's stock didn't fall in afterhours trading in sympathy with SuperValu. While Safeway is not adding to shareholder value recently, the company may find itself in a good position if SuperValu begins to sell off or close stores. Target, Wal-Mart, and Whole Foods are executing fantastically, demonstrating if you provide what the consumer desires, profits will follow.

Insiders own less than 1% of the company, but in the previous six months they didn't sell enough to develop a clear bias. I like to see management's and investors' interests aligned. With SuperValu, I can't say it's the case.

Based on my experience with gap downs following news-driven events similar to SuperValu, investors will see short-term lows Friday or Monday. I expect the stock to open on Thursday near or under $4 per share with morning strength, followed by weakness as the day progresses.

Upon reviewing the SuperValu chart, I expect short-term resistance near $4 and again at $5. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $4 a share, but also be prepared for bargain hunters to start positions under $3.50 as an entry.

If you are looking for Thursday's drop to signal a buying opportunity, you may find Friday or Monday to offer the best opportunity. There is no hurry jumping on board with SuperValu. Stocks dumping as a result of headline news normally take at least one, and more often two, good quarters before the market to find value. Watch for the second break above $5 as the one that "sticks."

What's the best play with SuperValu? There should be a very attractive trade coming up Monday. Near the end of the day if still trading lower, sell out of the money puts.

Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom. Betting on Goldman Sachs and Greenhill to do much more than hand SuperValu one more bill to pay seems unlikely and I would not recommend betting on a payday in the form of a high-paying buyout.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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