Buy Safeway Puts Before Thursday Earnings

Earnings season officially kicks off tomorrow with Alcoa (NYSE: AA ) leading
the way. The first week is generally a light one, although some heavy hitters
PepsiCo (NYSE: PEP ) , JPMorgan Chase (NYSE: JPM ) and Google (NASDAQ: GOOG )
dot the schedule. One company that may not be on many radars, even though it
brings in more revenue than Google, is Safeway (NYSE: SWY ) . The grocery chain
reports Thursday before the open, with analysts expecting 35 cents per share.
This figure represents a modest two-cent, or 6%, increase from a year ago. The
company has averaged about twice that growth percentage during the past four
quarters. The problem with SWY isn't how it does compared to expectations. In
fact, the company hasn't missed an estimate in the past five quarters. But
performance after reporting is an issue, as the shares have dropped an average
of 4.6% in just the one day following the past three reports. Today, while the
rest of the market is enjoying a huge up day, SWY is cruising at the breakeven
level. Perhaps this underperformance is due to the tag-team resistance of the
$18 level and the 50-day moving average, which have conspired to keep the shares
in check for the past couple of months. The stock has closed just one day above
the declining 50-day since plunging below it after the last earnings release.
The story with "traditional" grocery stores such as SWY and Kroger (NYSE: KR
) is that they can't keep up with the deep discounters that are attracting
more consumers amid the continuing slow economy. This is hardly a revelation.
But it remains a major problem for grocers who are caught between cheap prices
and upscale stores such as Whole Foods (NASDAQ: WFMI ). And it's why SWY is
down 22% this year. Yes, expectations for SWY are low. Sentiment is largely
negative with high short interest and just four "Buy" ratings from 20
analysts. But that's to be expected. And sentiment was bearish in front of the
previous three reports, which didn't prevent price weakness. There's no
reason not to expect more of the same. Buy the Oct 18 Put for around a buck.