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Supervalu Inc. (SVU) Improves But Is Overvalued

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SUPERVALU INC. (NYSE:SVU) investors have had a truly exceptional year on the market. After years of decline and stagnation, 2013 finally saw shares in the groceries merchant rise by a significant margin. It may be time for some restraint, however, according to at least one analyst.

Supervalu Inc. (SVU) Improves But Is Overvalued

Jason DeRise, an analyst following SUPERVALU INC. (NYSE:SVU) at UBS Investment Research, puts a price target of $6.30 on the firm’s stock in a new report on the company. The firm’s stock has jumped by more than 170 percent since January, and stood at $6.88 when the market opened this morning.

It’s all about Save-A-Lot

DeRise is worried about the core strategy at SUPERVALU INC. (NYSE:SVU). The company has massively outperformed rivals since its sale of assets to Cerberus earlier this year, but there’s a reason it had to sell those assets in the first place. DeRise is not particularly down on the company’s prospects, but he’s not sure its current strategies are likely to work.

One business that SUPERVALU INC. (NYSE:SVU) relies on more than any other is its Save-A-Lot chain of discount grocery stores. In UBS AG (NYSE:UBS)’s view, the arguments for and against the company’s future have not changed. It all comes down to what a particular investor’s ideas about that business are. Unfortunately there appears to be a wide range of radically different views.

DeRise sees several advantages that play into the hands of the new management at SUPERVALU INC. (NYSE:SVU), but he’s still not advising investors to buy into the company at its current price. The most advantageous factor, compared to previous management regimes, is the company’s comparative debt freedom. Flexibility follows giving management many more operative options.

Supervalu and overvalued

Right now SUPERVALU INC. (NYSE:SVU) is not a profitable company. That is expected to change going forward, but there are risks. The current price of the stock is not low enough to justify buying in according to the UBS AG (NYSE:UBS) analysis. Supervalu is simply too expensive.

That’s likely applicable to any company that has close to tripled in price in seven months. Investors have been getting behind Supervalu Inc. (NYSE:SVU) in a pretty big way. Those arriving to the party now are probably a little too late.

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