Great Atlantic & Pacific Tea Company: Perplexing Freefall

I have never anything like it in twenty years of trading: A stock declining more than 30% in one session without a single news event. That is exactly what Great Atlantic & Pacific Tea Company (GAP) shares did last Friday when they cratered from $14 to $9.60, before some very late buying helped pare their decimation to a 19% loss and a close of $11.28.  In comparison, GAP's preferred shares (GAJ) lost only 5% to $18.50, and with a $2.34 annual cash payout, the preferred shares (QUIBs) now offer a generous yield of almost 13%.

Why the carnage? It's hard to put a finger on why the shares took such a hit, but the most likely scenario was that a mutual or hedge fund needed cash to satisfy redemptions, and decided to pick on GAP as the equity "selected" for liquidation.  When a significant holder wants out of a stock, it can be brutal, as it simply hits every bid, systematically taking out each buy level, as the shares sink further and further. The supply of shares simply overwhelm the demand in a matter of minutes. Most of the volatility occurred in the last half hour of trading, as the stock tanked violently on extremely heavy volume of 3.9 million shares (three times average daily volume) before making a partial recovery.

The new short sale rule could have also magnified the carnage, as speculators now can short a stock without needing an uptick, prompting more and more selling pressure as shorts pile on to exploit the downside momentum.

Recent heavy insider buying: Both Tengelmann (owner of  a 51% stake) and Emil Capital Partners have taken a quick 35% loss on the one million shares they purchased just last month in the mid $17 area. Will Tengelmann continue to buy, now that the shares are in a "freefall" mode? Will they ultimately attempt to take the company private?

Goldman Sachs's Retailing Conference: The company's communication skills to Wall Street are in need of improvement. Management's presentation at the recent Goldman Sachs conference could have been more upbeat, as it seemed to take too much of a conservative stance, which may have "spooked" investors.  Senior management needs to provide more color and transparency in its future communications as well as supply a detailed vision of the Grocer's desired goals, and the strategy necessary to reach those goals.

Bottom line: The shares rallied almost 800% from 2005 through 2007 from $5 to $40 and since then have quickly given back almost 80% of those gains.  The recent carnage in the share price presents a "bargain" opportunity for value investors aiming to accumulate a position that could easily rally as much as 50% by the close of the year. Last Friday's new 52 week low and subsequent minor recovery, could have been the confirmation of a classic "capitulation" event, creating a compelling buying situation.

Disclosure: Long GAJ.

Comments

[Jakester:]

I think that the SEC's huge mistake of doing away with the uptick rule has a large part in this sort of thing also. The uptick rule has to be restored!

2008 Sep 15 09:19 AM

[David Livin...:]

Why should a company need to sell its story at an investment conference? Seems to me its balance sheet should speak for itself.

As for some fund dumping shares, seems like a stupid move by the fund. I think there is more to the story.

What about the sale of the Super Fresh division in MD and PA?. Thats been one of the worst kept secrets. Maybe those in the know have got wind that those stores do not have any serious buyers and are for all practical purposes ---- worthless.

2008 Sep 15 09:24 AM

[Jakester:]

The fact that GAP is back down to the lows reached on Friday doesn't bode well. If the Tengelmann interests aren't grabbing every share they can get at this price, the above poster may be on to something...

2008 Sep 15 11:50 AM

[Russ Winter:]

This stock to be gamed by Gangsters/Financial Mobster types. I have been watching the ticks and it is all mechanical 100 and 200 share nonsense to give the impression of "selling pressure". I'll bet one carefully placed 250,000 share order from a 'real' investor, or the Gangsters themselves ends it all.

2008 Sep 15 01:10 PM

[free fooder:]

What on earth is going on with this stock today?? They sold the Superfreshes in MD/PA?

2008 Sep 15 01:57 PM

[H.J. Huneycutt:]

Given GAP's balance sheet and cash flows, I don't necessarily know that there needs to be a huge event to trigger such a drop. I will say that if they survive and return to profitability, anyone who buys in right now ($8) and holds for a few years should be sitting pretty. However, even given the fact that this should be a favorable environment for them (a bad recession is probably good news for grocers), I'm still afraid they won't survive. I think they are still losing cash flows from operations if I'm not mistaken (but not nearly as bad as before).

2008 Oct 08 11:39 AM

[Cashmoney:]

GAP is not a compelling long story at all! Management is unfocused and lacks depth. The balance sheet is one of the worst I have seen in my banking years...why would they ever issue high-yield/bridges to fund warrant settlements when the company is not even cash flow positive. The name of the game in food retail is pumping capex into keeping the brand fresh...GAP doesn't even spend what the expense in depreciation. They sold the most profitable assets, made an acquisition of another poor-quality brand, and I would suspect they won't have liquidity to fund operations too far into the future with out some equity investment...my suggestion for you believers would be to actually read the footnotes.

2008 Oct 20 05:27 PM

[woodreal:]

How is it a fact that Super*Fresh in MD & PA are for sale? If so, why is this the worst kept secret?


On Sep 15 09:24 AM djlresearch wrote:

> Why should a company need to sell its story at an investment conference?
> Seems to me its balance sheet should speak for itself.
>
> As for some fund dumping shares, seems like a stupid move by the
> fund. I think there is more to the story.
>
> What about the sale of the Super Fresh division in MD and PA?. Thats
> been one of the worst kept secrets. Maybe those in the know have
> got wind that those stores do not have any serious buyers and are
> for all practical purposes ---- worthless.

2008 Dec 17 08:46 PM