Roundy's: Fresh-Faced IPO Stock With Juicy 9.3% Yield

| About: Roundy's Supermarkets, (RNDY)

Roundy's (NYSE:RNDY) is a Midwestern supermarket chain operating 159 supermarkets and 99 pharmacies in the states of Wisconsin, Minnesota, and Illinois. The company operates its retail grocery stores under the Pick'n Save, Rainbow, Metro Market, Copps, and Mariano's Fresh Market banner names. It recently went public on February 8, 2012, with surprisingly little attention given its enticing current 9.29% dividend yield. With a yield that large, if the stock was to stay flat, you would double your money with reinvested dividends in only 7.8 years! There may have been some speculation that Roundy's would not be able to pay out such a sizable chunk of its earnings to the investor, but with the annual dividend being 92 cents, well below the expected annual earnings of $1.49 per share, Roundy's clearly has enough earnings power to foot the bill. Furthermore, the company has a track record of being a safe business with steady earnings, even through tough economic times, as the company posted a 58% increase in profits in 2008 and only a 4.5% decrease in 2009 at the height of the financial crisis.

This small-cap stock with a market cap of 450 million offers tons of safety with its mammoth dividend. A dividend of this size acts as a cushion and limits downside potential in that if the stock falls in price, the dividend will just get fatter and fatter, luring investors back into the stock. Roundy's also provides the assurance of having zero European exposure, something not too many stocks can boast given the globalized markets of today. While other companies are posting disappointing earnings and having to cut forecasts due to the weakness out of Europe, Roundy's can look past all those causes for concern.

This is not just a conservative stock with no growth story; in fact, Roundy's offers plenty of exciting upside. The company currently has its largest presence in Milwaukee where it controls 55% of the market share, and Madison, Wisconsin, where it holds 32% of the market. Management has made it clear though that they want to expand their presence in Chicago, which obviously has the potential to be a huge market. Roundy's currently has 5 grocery stores in Chicago and are planning on opening another 3 by the end of 2012. This expansion into Chicago offers a very large growth opportunity. An expansion like this seemed unlikely before the company chose to go public, which was a fabulous decision in my opinion, as the money raised has allowed it to pay down over $100 million in long term debt and gives it easy access to potential capital in the future.

Another promising sign for Roundy's is the recent purchase made in the company by Greenlight Capital, with a 561,934 share position as of March 31, 2012, equating to $5.6 million worth. For those that haven't heard of Greenlight Capital and its famed hedge-fund manager, David Einhorn, he may be the most talked about hedge-fund manager today with the recent sway he has had over the market. Einhorn famously announced his fund's short position in Green Mountain Coffee Roaster's (NASDAQ:GMCR) in a Greenlight Capital presentation (funny coincidence with the Green), and the stock preceded to fall 17.5% over the next 3 days! GMCR is currently trading at around $20, down from the $82.50 on October 17, 2011 when Einhorn gave his presentation. A similar story could be told for Herbalife (NYSE:HLF), where Einhorn made a surprise appearance on their conference call to question their accounting methods, prompting shares to plunge 25% the following day! Having Einhorn back this stock is definitely a large vote of confidence.

Now just because Einhorn initiated a position in Roundy's doesn't mean one should overlook the potential risks in this stock. The company did disappoint on their last earnings release, reporting negative same-store-sales growth and cutting its outlook for the 2012 year. And its balance sheet is pretty weak, as it still has a tremendous amount of debt, even after the IPO.

However, I still feel the time to buy Roundy's is now. It hasn't even been mentioned yet that the stock is insanely cheap, trading at 7x forward earnings while the average supermarket trades at 10x earnings. Further, this stock is still an undiscovered gem. It is currently only being covered by 6 analysts, which is a small amount, and if this stock starts to catch the attention of more analysts, it could lead to huge institutional investment. That's one of, if not the best way for a stock to shoot up; when suddenly the stock becomes on the radar of institutions and they start to buy it up, as these institutional investors are the true movers of the market. Lastly, weakness from the competition has presented a golden opportunity to pounce on this stock's recent pullback. Supervalu (NYSE:SVU), one of Roundy's largest competitors, released poor earnings Wednesday after the close, sending the stock down a large amount in Thursday's trading. With it though, Roundy's was brought down 6% that day. I think Roundy's makes a great buy at current levels, and even if we don't get much of a move in the near future, you're getting paid a heck of a lot to wait with that ridiculous 9.3% yield.

Disclosure: I am long GMCR.