Safeway: Upside potential remains

Posted Jul 17th 2009 4:40PM by Joseph Lazzaro
Filed under: Safeway Inc (SWY), Stocks to Buy

This was a complex call, but I'm Reiterating my Buy rating for Safeway Inc. (NYSE: SWY) first recommended on February 20, 2009 at a price of $20.90.

Safeway is likely to continue to benefit from rising food demand for cheaper food, as the pronounced recession in California -- one of the states hardest hit by the housing downturn -- compels citizens to belt-tighten and seek less expensive food options. The FY2009/FY2010 EPS estimates for SWY are $2.11 to $2.29.

Further, Safeway has done a good job reducing costs, but all of the aforementioned may not be enough to offset high and rising unemployment in California, which is also likely to depress household formation for at least the next two quarters, and probably for longer.

Still, the Buy rating remains intact, but the Sell/Stop Loss has been tightened, to guard against any severe underperformance.

Stock Analysis: Safeway is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, 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 before October 2009. Sell/Stop Loss if you were to buy shares in this company: $14.75

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: california, groceries, household goods, HouseholdGoods, safeway