Acting boldly in any stock market carries with it considerable risk. Acting boldly in this market, amid the U.S. recession and an unresolved toxic asset situation, and you're looking at a 30-40% haircut up ahead. (Or worse.) Still, investors capable of tolerating risk would be wise to position themselves in a few defensive plays with decent upside potential. But let's make one thing clear: defensives with an upside are not, strictly speaking, conventional defensive plays. They carry more risk but, one could argue, that risk is reasonable, given the potential for the capital appreciation pop. With the above as a backdrop, grocery chain Safeway (NYSE: SWY) is worth a review.
Here's the argument in favor of Safeway: things in California -- vying with Florida for housing recession capital of the world -- are just about as bad they can get. The California Legislature has just resolved -- make that just barely resolved -- a $42 billion budget deficit stand-off, the absence of a resolution to which could have triggered, oh, just a series of cascading defaults and margin calls that could have threatened another 'major credit market event,' like the one that rocked markets in September 2008. Further, California household formation is at a low ebb, and the unemployment rate is nearing 10%. In short, it's not a glorious time for the Golden State, and from the standpoint of California-market-heavy Safeway, which also operates Vons Supermarkets, things can only get better.
Safeway should benefit from another trend that's emerging as the nation enters the new era: upper-middle-income adults who formerly shopped in gourmet delis and upscale grocers, but who are now shopping at general grocery stores to save money.
Look for Safeway's F2009 revenue to increase a modest 1.5-2%, but cost containment is expected to maintain modest earnings growth, despite obviously difficult economic conditions. And in this market, flat-to-modest earnings growth is front page news. (Or top of the web site news.) The First Call F2009 EPS estimate for SWY is $2.31.
Stock Analysis: Safeway is a moderate-risk stock. Safeway is an investment, not a trade. Consider buying a 25% position in SWY now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your SWY position in the first half of 2009. More-cautious investors should wait for SWY to clear and close above $23 before buying shares. Sell/Stop Loss if you were to buy shares in this company: $14.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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