Supervalu and grocery chains in general

Supervalu (NYSE: SVU) was today’s market loser, losing nearly half its stock value after announcing it is cutting its dividend to nothing and announcing a “strategic review”.

Investors chasing yield were obviously burned by this decision, amongst other people getting into the trap of thinking “if they can just increase their operating margin by 50 basis points this company is worth a fortune”.

Before yesterday, longer-dated debt of Supervalu (mainly through bonds of Albertsons) was trading above 10% yields to maturity – not exactly the sign of a stable credit. Now, you can get some 2030-dated paper for a yield to maturity of 14%.

Grocery chains run into the problem of the question of: “How do we compete with Walmart?”. All other chains try to diversify into more “premium branding” and those that don’t will end up in trouble like SVU. Whole Foods (NYSE: WFM) is probably the best example of a premium-branded grocery store (ironically with a premium valuation at present).

Gold producers

I have no interest in the major gold producers (or minor ones for that matter), but I find it odd that companies like Barrick Gold (TSX: ABX) and Kinross (TSX: K) are hitting lows when they are so wildly profitable.

Kinross is down by about half, but they have geopolitical issues which can justify some of the decrease. However, Barrick is down 20% (which is uncharacteristic of the stock, which is one of the lowest volatility stocks out there) and they continue to rake in the cash – selling prices of $1,700/Oz and total costs of about $740/Oz from their last quarterly report. The market is probably trying to price a significant increase in cash costs over the medium term.

I continue to be leery about commodity-based firms at this time.

RIMM’s quarterly result – analysis

Media are covering this so I’ll write a few words about their last quarterly report (Q1-2013).

As I indicated in my previous post, anybody thinking that RIMM will make a technological comeback is best to wait until expectations have been driven deeply negative. The quarterly result was much more negative than analysts expected (even when backing out the $335M goodwill expense) – about a $132 million loss, or roughly 25 cents a share, which excludes depreciation and amortization.

Analyst estimates averaged roughly a breakeven quarter.

It is very likely that year-end estimates and next year’s estimates are going to go negative, and this is when lower expectations finally baked into the price of the stock. After-hours trading has RIMM down 15%.

Perhaps more damaging was the announcement that their next-generation project (Blackberry 10) will be launched later than they thought, aiming for the first quarter of 2013. While this is obviously not good for them, it would be even more disastrous for the company if they released something incomplete or half-baked (like their playbook). They do have about $2.2 billion in cash to deploy and no debt on the balance sheet, so as long as they can keep the expense side of their ledger lean, they will be buying themselves enough time to get another product out the door.

In terms of risk-reward, the downside to the stock is probably another 50% from current levels. Technology companies with third-ranking products in the marketplace don’t tend to warrant much of a valuation premium.

I have no position in RIMM. Just following.

Swiss Francs to Euro

The following is a fairly telling chart – the Swiss National Bank is holding the line at a 1.2:1 exchange rate between the Swiss Franc to Euro (i.e. the SWB is not allowing their currency to strengthen relative to the Euro):

The question of the day for all traders is: Will the Swiss Bank relent? They have an infinite amount of Swiss Francs to sell into the market for Euros, but will they want the world to hold their currency while they hold onto (presumably more) risky Euro currency?