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Chart Pattern Predicts This Stock Could Rise 49% by Year-End

From a technical analysis standpoint, the chart of Safeway (NYSE: SWY) excites me. First, shares of the second-largest U.S. grocery-store chain have just broken a major downtrend line that dates back almost two years. Second, they have completed a rounding bottom base formed over roughly the past nine months and appear to be headed higher. With an upbeat revenue and earnings outlook, plus a healthy dividend, the stock looks attractive.

The California-based grocery store -- which operates approximately 1,700 locations across the United States and western Canada, and also holds a 49% interest in food and general merchandise retailer Casa Ley, which has 185 outlets in northwestern Mexico -- seems to be on the rise for three reasons:

1. Increased focus on customer loyalty programs;
2. Divesting of key assets; and
3. A shift in upper management.

Loyalty Programs

The company's "just for U" loyalty program helps shoppers save money with digital coupons and personalized specials. In fact, members can save up to 20% on groceries just by being part of the program. Members receive deals specifically tailored to them, based on products they frequently purchase.

In the most recently reported third quarter, management said the "just for U" program helped the company improve sales volumes. As more customers join, sales in the upcoming quarters should be stronger. According to CEO Steve Burd, management expects to see fourth-quarter same-store sales growth driven by increased "just for U" engagement.

Safeway is also rolling out a fuel loyalty program in conjunction with Exxon Mobil (NYSE: XOM). As a bonus to loyal shoppers, customers who buy groceries at Safeway will be able to receive gas discounts at Exxon in the Mid-Atlantic states.

Asset Sales

The company is also looking at divesting or spinning off some assets. According to recent reports, Safeway may sell off its Canadian stores. There are currently about 200 Safeway stores across western Canada. In 2011, these stores generated $6.7 billion in revenue. There are rumors Canada's third-largest supermarket chain, Metro, may bid to acquire Safeway Canada.

Safeway also intends to spin off its most profitable division, its minority stake in Blackhawk Network Holdings. The holding company issues pre-paid gift cards for restaurants, retail stores and food outlets. In 2011, Blackhawk's revenues were around $100 million. It's expected the spin-off will be completed by mid-2013. These asset sales should raise a huge amount of cash, which Safeway can plow back into making its core assets more profitable.

Management Shifts

In conjunction with asset sales, the company is bringing in new management. Safeway just announced that Peter J. Bocian will be the company's new Executive Vice President and Chief Financial Officer. Bocian formerly worked at financial services company, JPMorgan Chase (NYSE: JPM).

Additionally, after 20 years at the helm, current CEO, Steve Burd, announced his retirement plans for May of this year. A new CEO, flush with cash from asset sales, could take the company in new, dynamic directions.

As the chart of Safeway stock below shows, shareholders seem optimistic about the stock's future.

Safeway Stock SWY Chart

This Feb. 11 trading week, shares bullishly broke a major downtrend line that has been forming since the stock's May 2011 $23.98 high.

At the same time, shares have emerged out of a rounding bottom basing pattern. The top of the base is marked by the February 2012 high of $22.32. The low point of the base is marked by the stock's near twice tested bottom, as shares hit a low of $14.43 in July, and then flirted with this low point again in October.

Since hitting the second low in October, shares have been on the rise, and a steep uptrend line has formed. In early 2013, the 10-week moving average (blue line) bullishly crossed above the 40-week moving average (red line) -- a highly bullish event. Soon after, the stock challenged important historical resistance, near $19.17, which dates back to late 2010.

Having now broken the major downtrend line, shares appear to be moving toward the completion of a second basing pattern, with resistance at $22.38. If $22.38 can be exceeded, according to the measuring principle for a basing pattern -- taken by adding the height of the pattern to the breakout level -- shares could potentially reach a high of $30.33 ($22.38-$14.43 = $7.95; $7.95+$22.38 = $30.33). Based on the stock's current price, this target represents potential gains of almost 50%.

The bullish technicals are backed by a strong fundamental outlook. On Thursday, Feb. 21, Safeway is scheduled to report fourth-quarter and full-year 2012 results. For the full 2012 year, analysts project the company's partner fuel program will cause revenues to increase 1.1% to $44.09 billion, from $43.63 billion last year.

In the first quarter of 2013, analysts expect revenue will rise 1.4% to $10.14 billion, compared with $10 billion in the year-earlier period.

The earnings outlook is far more positive. Due to growth from the company's expanding loyalty programs, analysts expect fourth-quarter earnings will increase 12% to $0.76, from $0.67 per share in the year-ago period. For the full 2012 year, analysts project earnings will rise 12% to $2.01, from $1.78 per share last year.

In the first quarter of 2013, analysts expect increased demand, due to the customer loyalty program, will help push up earnings 13% to $0.34 from $0.30 per share in the comparable year-ago period.

In addition to a solid fundamental outlook, the company is attractively valued based on its low trailing price-to-earnings (P/E) ratio of about 9.9. Based on this ratio, the company's PEG (P/E divided by growth rate) is low at about 0.9. Typically, a PEG of 1 or less shows attractive valuation. The company also has a very low price-to-sales ratio of about 0.11. In comparison, the industry average for major grocery stores is about 0.36.

SWY offers an attractive forward annual dividend yield of about 3.4%. Management has consistently raised the dividend every year since 2005, and with increasing earnings should be able to do so in the future.

Risks to consider: With big-box retailers like Wal-Mart (NYSE: WMT) offering increased fresh food selections, Safeway is facing growing competition. However, the company is implementing more loyalty programs to reward customers for their commitment. These programs should help retain customers and contribute to future growth.

Recommended Trade Setup:

-- Buy SWY at the market price
-- Set stop-loss at $17.78, slightly below support of the current uptrend line
-- Set initial price target at $30.33 for a potential 49% gain by late 2013