Tuesday, June 7, 2011

Super Valu LEAPS... Leverage upon Leverage.

While I wish that I could say something insightful about the situation at Super Valu, I can't. Frankly Speaking, Barel Karsan, and others have already done a stupendous job espousing the thesis in regards to operations and the undervaluation for the common stock.

I will say that when a company is trading for 3-4x the average yearly improvement in tangible book value (and, in a time period that includes the Great Recession) it should spark your interest. They are paying down debt like crazy, have someone who appears to be a great executive at the helm, and while they may not be the best operator- they are improving and expanding.

Furthermore, the thing that I really like about this situation, is that they are used a ton of debt to generate their returns. Yes, leverage when poorly used can destroy companies, people, and as we have recently seen, entire economies. However, in the case of Super Valu, the company trades at such a low multiple of it's cash generation that it should have no trouble rolling over it's debt, if it can't make full payments in the near term. When a doomsday debt scenario is baked into a stock price, it can often greatly magnify returns when the perceived problem is "worked out" (anybody remember the absurdity of worrying over Steak 'n Shake defaulting on it's debt?).

In the light of this, I thought it to be appropriate to buy some SVU LEAPS. The real beauty here, is that I am getting to use the implied leverage of the call options, benefit from the leverage the business uses, have limited downside, and get (in my mind) a pretty good chance for huge returns. Certainly, while there is the potential for a total loss of capital; but when representing a small amount of my portfolio, I am more than happy to take that chance.

Disclosure: I own LEAPS of SVU. This is not investment advice. Always do a ton of your own research in regards to anything that I say, do, write, or so much as even think about.

5 comments:

Anonymous said...

Hi Jeff, What options did you buy here?

jeff said...

The January 2013 $10 calls. For the reasons I say in the article, I can't stress enough that this may not play out at all.

Anonymous said...

I want to get a better handle on their debt and the real estate they own before getting in here. January 2013 $10 sounds reasonable.

Bill said...

Hi,

According to my calculations, the 10$ LEAPS are only superior to the 7.5$ LEAPS if the price of the stock nears or exceeds $14. Do you really expect the stock to go up this high? Or are my calculations wrong?

jeff said...

Bill,

While I don't "expect" it, I certainly won't be shocked if the stock price more than exceeds $14/shr. It is part of a greater strategy in my portfolio. I feel that the risk reward here makes sense for me, and recognize doesn't isn't for a lot of other people.

Once the debt concerns are eased, The stock should preform admirably AND, it as it is presently trading for under 5x the company's average improvement in book value, it seems really cheap to me!