Safeway (SWY)-- one of the largest food retailers in North America is on a tear after hours, trading up 30% or $6.89 to $30 per share. The pain for short sellers has only just begun. Safeway sold its Canadian stores to Empire's Sobeys for 5.7 BILLION. That is 103% its current Market capitalization. This makes the P/E ratio less than 1, which is extremely low. Its current cash on hand will be greater than its market cap.
According to Robert Edwards, CEO and President of Safeway, the offer by Empire to purchase the 223 Canadian Safeway was unsolicited by Safeway and Safeway is gaining a large and "generous" premium for the stores. We could be at the start of a run and massive short squeeze, very closely resembling that of Tesla Motors (TSLA). In my article, I will explain why I believe this is the "Perfect Storm" for short sellers and why it is only going to get worse in the upcoming days.
Factor One: The Massive Short Float
SWY has approximately 240 million shares of common stock in its float. Of these 240 million shares, over 20% of them have been sold short. This means that the short float is right around 48 million shares. With only 4.7 million shares exchanging hands in after hours, if all the shares bought were to cover short positions (which is extremely unlikely), there would still be over 43 million shares in the short float. Short sellers will be frantically scrambling to cover their potentially limitless losses. This presents the opportunity for a massive short squeeze that will cause the price per share to continue to soar.
Factor Two: The Upcoming Earnings Call and Dividend Payment
If short sellers do not cover by June 18th, they will have to pay the $0.20 per share quarterly dividend. This factor alone would have caused a small short squeeze going into earnings. This extremely bullish news of the recent sale has completely taken short sellers by surprise and will cause a "buy to cover" frenzy. With Safeway currently at its 52 week high, no short sellers are in the green unless they have been holding their short position since May 2008 or prior. That is quite unlikely with the interest on margin, that would be quite costly. When you are in the red as a short seller, as a majority of Safeway shorts are, having to pay the dividend is a kick in the ribs. With momentum rallying behind this sock and short sellers accepting their mistakes and scrambling to cover to prevent further losses and having to pay the 20 cent per share dividend. The potential for a massive and prolonged squeeze is very likely.
Factor Three: Share Buyback Program and Debt Repayment
According to the Press Release, President and CEO Robert Edwards stated:
"The substantial cash proceeds from this transaction will allow us to create value for Safeway stakeholders and contribute to the growth of the ongoing business."
According to the rest of the release, proceeds from this sale will be used to pay 2 billion in debt and the rest will be used in a share buyback program. The buyback program alone will add tremendous value to the current outstanding shares, decreasing the total outstanding float by an estimated 60-70 million shares or an estimated 2 billion dollars. It would increase the value of the remaining shares and be very beneficial to the shareholders. The company is basically using 2 billion to reduce the number of shares and increase the value of the remaining shares. When the supply of something is decreased, the value of the remaining is increased. A stock buyback program is one of the most bullish signals it can give to its investors, and one this large is an extremely positive signal for Safeway and its investors.
Safeway, after selling its 223 stores and 12 manufacturing facilities in Canada, is still very prominent in the U.S. Compared to its 1500 stores and 20 facilities nationwide, the sale of the Canadian operations seem very minor but beneficial to Safeway and its investors. The Canadian operation accounted for 6.7 Billion in revenue, while the U.S. operations accounted for 37.5 Billion in 2012. The company should have a very exciting earnings call on the 18th and hopefully excite investors with news of the debt repayment and share repurchasing plan.
Its Industry's average P/E ratio is 15, and currently-- as of market close on June 12th-- Safeway has a P/E of 9, one of the lowest in its industry, which also shows great potential for growth. Not to mention the 3.46% or $0.80 cent per share dividend is way above the industry average of 2%. Safeway is expected to post earnings of $0.51 per share and any beat will see a positive reaction. Additionally, during the past year, earnings growth has outpaced its five year growth rate. Going forward, I believe SWY is poised for very strong growth and the sale of the Canadian operations was a very strategic move that will greatly benefit the stock in the short and long run.
SWY has only began its run and could very well test its pre-2008 highs. With at least 43 million shares still short, the stock is only beginning what looks to be a massive and prolonged short squeeze. It has very bullish news of a very large stock buy back program on the horizon, along with the repayment of 2 billion in debt. Safeway is giving tremendous value to its share holders by using a majority of the 5.7 billion in a huge buyback program. It is safe to say most short sellers are in the red and we will see buy orders pouring in in the upcoming days by shorts attempting to cover to limit their losses-- and as I said before, avoid having to pay the 20 cent dividend on June 18th. Safeway has become a bear trap and could be a "perfect storm" for short sellers.