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Loblaw Companies Limited Executive Chairman Galen Weston speaks during the annual general shareholders' meeting in Toronto, in this May 2, 2013 file photo. Canada's largest food retailer, will buy Shoppers Drug Mart Corp for C$12.4 billion ($11.9 billion), as it faces increasing competition from Target Corp and Wal-Mart Stores Inc. (Mark Blinch/Reuters)
Loblaw Companies Limited Executive Chairman Galen Weston speaks during the annual general shareholders' meeting in Toronto, in this May 2, 2013 file photo. Canada's largest food retailer, will buy Shoppers Drug Mart Corp for C$12.4 billion ($11.9 billion), as it faces increasing competition from Target Corp and Wal-Mart Stores Inc. (Mark Blinch/Reuters)

Schizas’ Mailbag

Loblaw shares' fate depends on regulators Add to ...

Hello Lou,

If you owned Shoppers Drug Mart shares would you sell or swap them for Loblaw shares?

Thank you,

Bryan

Hey Bryan,

Thanks for the assignment and congratulations on a profitable trade.

This will be the second time I undertake an investigation of the charts for Loblaw Companies Ltd. The first time was on April 23, 2013, on a request from Pat who asked if there was any hope for his investment. The shares were trading for $32.70 and had been in a downtrend since September of 2010 where it traded for $43.00. The all-time high for the stock was hit in 2005 when investors enjoyed a price just over $76.00.

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At the time the research indicated that there was intense competition in the grocery space and that management had failed to successfully face off the challenge. The stock edged lower to $31.27 by May 31, 2013. From there a double bottom formed by late July indicating that the weakness was coming to an end and a trend reversal was developing.

A study of the charts will help determine if you should hold the shares.

The three-year chart has a number of features including the big gap up in December of 2012 when the company announced the conversion of much of their real estate portfolio into a real estate investment trust. The stock built a base near $40.00 until the move up to $46.00 in May of 2013. The stick and flag that surfaced in May signalled that the advance had more in it and subsequently the shares hit $50.00 by June. The stock moved briefly through $50.00 on the announcement of the Shoppers Drug Mart Corp. acquisition but has been giving up ground through February 2014 where it caught a bounce.

The MACD and the RSI on the six-month chart signalled a sell in November of 2013, a buy in December, a sell in January of 2014 and a buy in February. At this time the momentum indicators are not indicating a shift lower. There is resistance at $47 that needs to be addressed and from a risk management perspective I would like to see a golden cross form.

The last concern is the ruling of the competition bureau which is still pending. It makes me wonder what the hold-up is. It might be the consolidation of the pharmacy business that’s the fly in the ointment. The decision is the big flex point in the short term. The longer term issue is if the management team can merge these two entities successfully. Often times mergers and acquisitions go south on clashes of culture which reduces effectiveness and efficiency.

What also has to be resolved is execution. Management had trouble when the competition turned up the heat in grocery so the question becomes can they get more sales per square foot by cross selling private label drugs through the grocery stores and private label food through the drug stores. Some of the research I conducted suggested that the drug stores will grab share from convenience stores. The question I asked myself is, will they sell wine through the drug store footprint?

At this point there are no indications that the move up that started in February is about to stall so if you are risk tolerant it’s a hold. If you are risk averse it’s a sell.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lou@happycapitalism.com.

 

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