Supermarket chains, ground down by a year of price wars aimed at keeping hard-pressed customers, are starting 2010 wondering how much longer they can go without further harming their share prices.

Grocery-sector stocks have taken a drubbing the past three months, with Kroger Co. (which operates Smith's stores in Utah) down 14 percent, Supervalu Inc. down 11 percent and Winn-Dixie Stores Inc. down 27 percent. Safeway Inc. is down 7 percent.

By comparison, the S&P 500 Index is up 4 percent over the period.

Steep discounts, which have been eating away at already-low profit margins and forcing some grocers to change their promotional tactics, show no signs of abating.

"In my 30-plus years in retail, I've never witnessed the intense level of price reductions and promotional activity now occurring," said Supervalu CEO Craig Herkert.

In a cost-cutting move to shed most of its Utah stores, Supervalu sold 34 Albertsons markets to Associated Food Stores in November. Dick King, head of the former Albertsons stores insists his new division of renamed Fresh Market stores will make money. The purchase increases the buying power for Associated Food, which supplies nearly 500 independent grocers in seven western states.

"We know food retailing or we wouldn't have done the deal," said King.

Behind all this are tight-fisted consumers, deflation and the highest U.S. jobless rate in a generation. The pain from weak growth in same-store sales goes straight to the stock price.

At the same time, the established players are facing stiff competition from aggressive discounters such as Wal-Mart Stores Inc., Costco Wholesale Corp., Target Corp and WinCo,

Hapoalim Securities analyst Ajay Jain isn't betting on a swift recovery. "For food retailers, (sales trends) tend to be very closely linked to the employment cycle. Without significant improvement in the nonfarm payroll data or wage growth, a sales or margin recovery is unlikely to shape soon."

Stock valuations are nearing 2001-02 levels, the last time grocers hit rock bottom after consumer spending slowed. Yet Wall Street analysts remain cool to the sector.

Price wars will weigh on supermarkets for at least another six months, commented Pali Capital analyst Bob Summers: "Everyone will continue to fight for that dollar."

Based on consensus long-term stock-price targets, analysts are forecasting slim gains over the current share price levels for Safeway and Supervalu. Kroger is considered more of a safer bet, with 61 percent of analysts covering the grocer recommending the shares.

There have been some recent buyers of supermarket stocks. Two weeks ago, Supervalu's Herkert purchased 25,000 shares of his grocery chain in an open market transaction.

In another regulatory filing, investment firm Manning & Napier Advisors disclosed it purchased 7 million Kroger shares and 6.8 million Safeway shares, giving the firm more than a 1 percent stake in each. The shares were bought in mid-December.

"In the past, this has proven the time to buy the stocks. We can't ignore valuations like this," said Christian Andreach, a managing director at Manning & Napier.

He couldn't say if sector has bottomed on a valuation basis but he thinks the opportunity outweighs the risk. The firm is betting on food prices to firm up in the near-term and gradual improvement in the job market. This would help stem price cuts.

It's a tough stock call on the grocery business, according to Vitaliy Katsenelson, portfolio manager at Investment Management Associates, a value investor. He is considering whether to invest in the sector again; his firm sold its Supervalu shares when the chain cut its dividend 50 percent in October.

A big question is how much the price wars eat into future cash flows at supermarket chains, added Katsenelson. Supermarket chains have been using existing cash to run promotions and lower shelf prices on everyday foods.

Supervalu, which runs the Albertsons, Jewel-Osco and Sav-A-Lot chains, gave investors something to cheer about last week. It reported its gross margin was more stable for the quarter ended Dec. 5, compared with the past two periods.

But sales at stores open one year worsened, falling 6.5 percent. Supervalu said customer count declined 2 percent and the average basket size fell 4.5 percent.

The company decided to forgo some promotions to preserve its operating margin. Supervalu also is in the process of cutting back on the number of products it keeps on its shelves.

Tribune reporter Dawn House contributed to this story