Waterstone Market Neutral Fund got thrashed in July. The equity fund focused on short positions was down -5.29% in the month, the largest decline since September 2008. The fund’s year to date performance has been trimmed to -12.6%.

Supervalu Waterstone

Waterstone loses in Supervalu short bets

Waterstone incurred the largest underperformance in SUPERVALU INC. (NYSE:SVU), whose shares surged 19% in July in response to Q2 earnings. The fund believes that Supervalu is marred by several shortcomings, including higher prices compared to peers, worn-out stores and a struggling balance sheet. Waterstone points out that Supervalu continues to tout an adjusted EBITDA number which likely excludes several costs, and the company has not been clear on what this number includes and what it doesn’t.

Supervalu is overhyped

Waterstone thinks that the only step Supervalu has taken to anchor its declining actual sales is cutting costs, and the fund says that it is not possible for the company to just save its way to prosperity. Waterstone continues to believe that the company’s shares are overvalued primarily because the company projects very rosy forward-looking statements. As soon as markets stop focusing on one time cost restructurings and short term adjustments, the falling revenues and uncompetitiveness of the company will come to the forefront and SVU will be priced at its correct value.

Waterstone compares SVU’s valuation to other grocery retailers like The Kroger Co. (NYSE:KR), Safeway Inc. (NYSE:SWY) and Roundy’s Inc (NYSE:RNDY), and says that SVU trades at higher premium compared to peers merely on hopes that it will post great earnings. Waterstone estimates the actual value of Supervalu within $3-$4 range. The stock currently trades around $7.

Waterstone also detracted in its short Chesapeake Energy Corporation (NYSE:CHK) position against a long in Devon Energy Corp (NYSE:DVN). Longs in Doral Financial Corp. (NYSE:DRL) and Parr Petroleum Corp (OTCBB:PARR) were also up for a second consecutive month. Waterstone is also gaining from payment of MF Global Holdings Ltd (OTCMKTS:MFGLQ) claims.