Safety in Safeway?

In the Tuesday Commentary you mention that food and beverage stocks are doing well. I glanced through some charts and like the looks of Safeway. Your opinion on this stock would be much appreciated.

Safeway, Inc. (SWY) is currently riding on the coattails of a bull market within the food sector and the exodus of funds out of the technology stocks. It is a retail supermarket chain that operates over 1,660 stores nationwide. Within the last year, Safeway has made a concerted effort to improve the appearance of its stores and has instilled a higher level of service within its associates. With the likes of Kmart and Wal-Mart erecting Super Stores on every corner, which include a full grocery market, Safeway has had to revisit its core strategies in order to retain market share. Along these lines, Safeway has worked at improving the efficiencies of its procurement system and is offering a wider product mix to attract and retain more customers.

Within the retail-grocery arena, margins are everything. Chains like Safeway rely on mass sales to make up for historically low margins on food products. Safeway, however, has been able to boost operating margins to over 7%. This compares to operating margins of 4.4% for Albertson's (ABS) and 4% for Kroger (KR). Higher margins allow Safeway to keep debt down and to sustain favorable trade agreements with suppliers.

Turning to the charts, we can see that SWY has been on a nice run. We are coming up against resistance of $62.50, which corresponds with the high that was achieved January 4 1999. Since this represents long-term resistance, I don't think SWY will have much of a problem getting through this level. The immediate concern, however, is the fact that SWY is overbought. The RSI is at a level that has resulted in a short-term sell-off in the stock. Backing this up is the fact that SWY has not been able to hold its day-highs for the last three trading sessions. I might wait for a bounce near the $57.75 area on good volume of at least three million shares to initiate new positions.

Looking at a weekly chart, SWY can be seen tracing a large cup formation. This formation is generally followed by a period of sideways action, called a handle. The handle is formed as the stock digests its gains. Therefore, unless the economy shows more proof that we are in for a hard landing, I might expect some tradable ups and downs in the stock but no significant near term moves higher. If we are in for a hard landing and the economy slows, investors will seek out safety plays such as SWY, which should drive demand for the stock. This could fuel a momentum play within SWY that would be more tradable to the upside.

Good Luck and Have a Good Trading Day

Craig Seidler
Assistant Editor