Get Ready For The Trading Rebound In Supervalu Shares

Jul.16.12 | About: SUPERVALU Inc. (SVU)

Supervalu Inc. (NYSE:SVU) shares have been hammered in recent days, but a trading opportunity might be coming for investors very soon. The company announced disappointing news on a number of levels and that it would seek strategic alternatives as a possible solution.

Supervalu is a major grocery retailer and it also owns Albertson's. The grocery retailing industry is highly competitive and as other companies, like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), increasingly move into this space, it just puts more pressure on profit margins. This could make it tough for buy-and-hold investors of Supervalu, but as the stock has lost more than half its value in just a few days, a solid trading opportunity could be at hand.

Here are a few points to consider - explaining what signs investors should be looking for and why the stock could be poised for at least, a temporary rebound:

1. After negative news is released and a stock plunges, there is often a rebound worth trading. Some investors call it a "dead cat bounce", but depending on the situation, it can be more meaningful. In this case, Supervalu shares seem to have strong potential for a rebound, the only question is: from what price levels?

In order to find the answer, investors often want to see a very high volume sell-off in which investors capitulate and dump their shares at what seems to be any price. It is safe to say we have likely seen the huge volume that often occurs at a short-term bottom, since the stock had volume of about 72 million shares on July 12th, and about 40 million shares on July 13th.

This stock has average trading volume of around 7 million shares, so those numbers tend to confirm the probability that this stock is at or near the bottoming-out stage.

2. While some investors are speculating that this company could go bankrupt, the recent financial results do not appear as dire as the stock price would seem to indicate. Supervalu has been paying a dividend for many years and the yield was quite generous, however, the company decided to suspend the dividend. This news seems to be what caused much of the damage to the stock price.

Basically, income investors and mutual funds that invest in dividend-paying companies have no reason to keep holding the stock now, and that appears to have caused a mass exodus in the past days. While the dividend suspension is bad news in the short term for income investors, it is actually a smart business decision and a potential positive for the company in the long run.

The painfully tough decision to cut the dividend is a sign that management is willing to take serious steps to turn around the fortunes of this company. Adding to the idea that management is willing to make tough choices is the fact that it is hiring outside firms to review strategic alternatives. This could lead to a sale of all or part of the company, if successful.

3. Prepare for the rebound: Since we saw a high-volume sell-off on news that the results would be weaker than hoped for, and the suspension of the dividend, the volume should start to trend lower. As volume drops and the stock starts to show signs of stabilization or even strength, it might make sense to start buying the stock for what could be a solid rebound.

Supervalu has been a heavily shorted stock, and I expect shorts to help fuel a rebound in the stock price soon. According to the latest data, there are over 102 million shares short, and with average volume of about 7 million shares, it would take about 15 days worth of volume for shorts to cover. Shorts have made plenty of money very quickly in this stock, and chances are that a large number of them will want to take profits by covering once they see that the Supervalu downtrend has ended for now.

Short-covering could be the primary driver for a rebound, but more hopeful news and analysis or even insider buying could also help spark a rally.

Key Data Points For Supervalu:

  • Current Share Price: $2.32
  • 52-Week Range: $2.32 to $9.44
  • Dividend: recently suspended
  • 2012 Earnings Estimate: 85 cents per share
  • 2013 Earnings Estimate: 85 cents per share

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SVU over the next 72 hours.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.