Supermarket Stocks Finally Have Their Breakout Day: More to Follow

 |  Includes: KR, SVU, SWY
by: Mark Krieger

Wednesday was a banner day for supermarket stocks, as all three of the major chains (SVU, SWY and KR, aka “the big three”) posted hardy rallies despite a nasty 1.1% loss in the DJIA. Their relative strength was off the charts as SWY led the pack with a gain of 6.1%, SVU tacked on 5.5% and KR added 2.3%. Their strength was even more striking, considering they all traded twice their average daily volume.

What prompted the rise? The whole sector was just too oversold and due for a pop, and probably got some help from frantic shorts covering, eager to avoid the inevitable squeeze. Another catalyst for the strong showing, was attributable to positive commentary from Jefferies & Company’s Analyst Scott Mushkin, who wrote the industry is in the midst of a turnaround, due to: (1) Signs that hyper-competition and deflation are coming to an end (2) Stores in major markets have shown pricing bottoms (3) Macroeconomic factors are starting to improve (4) Consumer sentiment is beginning to improve. In other words, things are getting a whole lot better, for those of us who would rather not have to decipher all the economic "mumbo jumbo".

Big buyers develop: Manning and Napier Advisors has shown a voracious appetite for supermarket shares. The Investment firm just reported purchasing duplicate 7 million share blocks in both SWY and KR last December. The firm justifies the acquisitions by explaining they can’t ignore valuations like this and theorize the opportunity to buy the stocks at these levels outweighs the risk.

Bottom line: The name of the game is to buy low and sell high and the sector is still rather disliked, so even after some decent appreciation recently, it could be argued that grocery stocks are still in the infant stages of a recovery, representing compelling value. A quick 20% bump to each of the share prices in the “big three” should be “in the bag”. The grocery bag that is!

Disclosure: Long SWY, KR and SVU