Tuesday, March 5, 2013

Safeway (SWY) - Vol Rises as Stock Rises; Tug-of-War Between Analyst and Management. Stock Up But Core Profit Down 80% in 4 Years

SWY is trading $24.31, up 1.7% with IV30™ up 11.3%. The LIVEVOL® Pro Summary is below.


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Safeway Inc. (Safeway) is a food and drug retailer in North America. As of December 3 1, 2011, the Company had 1,678 stores. Its United States retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region.

This is a fascinating story -- sort of a tug-o-war between an analyst that as some chops and the reality of the stock price movement. SWY came up on a real-time custom scan that hunts for calendar spreads between the front two months. It also comes up on the IV30™ day gainer scan, but whichever scan you like, it's the story that really makes this one interesting.

Before we get to the scan details below, here's the news -- a really nice article from AP that sums up the story:

NEW YORK (AP) -- A Cantor Fitzgerald analyst said Tuesday that while Safeway Inc. executives may paint a rosy picture when they speak with analysts this week, he's not as optimistic about the supermarket chain's prospects.

Ajay Jain backed his "Sell" rating [] saying that its most recent quarterly results may have given investors the wrong idea.

Late last month, Safeway released fourth-quarter results that were far better than Wall Street expected. []

But Jain said he thinks management's comments at the time created a "major misconception" that Safeway has turned a corner as a result of the program, adding that he expects the company to issue a better-than-expected earnings guidance at its analyst meetings Tuesday and Wednesday.

Jain estimated that operating profit at Safeway's U.S. operations fell close to 60 percent between 2008 and 2012, while core profitability has dropped by more than 80 percent.

"We believe Safeway's U.S. earnings and operating margin trajectory appears to be a highly overlooked issue and should be of great concern to investors," Jain wrote in a note to investors.

Source: AP via Yahoo! Finance Ahead of the Bell: Safeway

Incredible juxtaposition of nearly new highs in sock price ad rising earnings forecasts but with the reality of "U.S. operations fell close to 60 percent between 2008 and 2012, while core profitability has dropped by more than 80 percent."


OK, onto the scan details and some analysis.

Time Spread Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

We can see that mar vol is priced above Apr vol for all strike prices and further, that the Mar skew shows a parabolic shape reflecting greater two-sided tail risk in the near-term. So here's an example of the stock rising while vol is also rising (per the Symbol Summary above).

Now we can turn to the six-month Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Check out the meteoric rise since the start of 2013, with the equity price going from $18.35 to now $24.31 or ~33% in just two months. We can also see the pop off of earnings (the blue "E" icon). The stock closed at $20.13 the day before earnings and is now ~20% higher in three weeks.

On the vol side we can see the vol rise into earnings (normal), then drop after (also normal), but it has now found another leg up, including today's 11.3% pop (which is actually now a 15.6% rise as I write this article). So again, stock rising with rising vol. It does happen...

Finally, let's look to the Options Tab (below).

Across the top we can see that Mar is priced to 53.28% while Apr is priced to 38.35%. Note that the vol diff between these months is not due to an earnings event (that already happened a few weeks ago). This is a fascinating tug-of-war IMHO, one that brings to light several interesting positions to analyze in the next few weeks (or days).

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