Kroger Co. (KR)

(A Top Pick November 13, 2017. Up 34%). He bought this stock expecting inflationary food prices to take it up, then tripled his position when Amazon caused a panic by buying Whole Foods. He sold off the investment and has bought other consumer stocks with the proceeds.

This was suffering with its entire industry a few years ago but has figured out how to compete and is now doing extremely well. It has strong earnings. He expects acquisitions to be a bolt-on variety (e.g. niches). Grocery is a tough space because of entrenched competition from Amazon, CostCo and Walmart. He is not buying grocery stocks because of the difficulty of this space, but he is very impressed with the management of Kroger and their success in this space.

This had a couple of issues. First there was food deflation, which tends to cause excess competition in the grocery sector. And then there was the Amazon purchase of Whole Foods. That took the company down from $30 to $20. This is selling at about 10X earnings, compared to Loblaw’s (L-T) selling at 17-18 times. Kroger has a little more debt, but own half their stores. The largest retailer in the US. Dividend yield of 2.3%. (Analysts’ price target is $23.)

You have stocks that screen really well on a lot of metrics, and this company is one of them. It generates cash flow. The industry has been beaten up. There are some valid reasons for that, with a lot of big players coming into the grocery space, including Amazon (AMZN-Q) which has just annihilated businesses. What makes it challenging, is that they are dealing with consumers. She doesn’t like the consumer space, because there is no loyalty, and would rather be elsewhere.

She does not follow it closely. Food retaining is quite competitive. She does not like the space in the US. She only owns L-T in Canada and they also have shoppers which she likes. She would not add US retailers to the US portfolios.

The grocery space has been really, really tough. Underperformance relative to the market really shows that. There has been a lot of competition coming in such as Wal-Mart (WMT-N) and Costco (COST-Q). Now you are getting potential online entrants. If Amazon (AMZN-Q) decides to get into an industry, completely decimate margins, and operate at what seems like a loss in order to take share, it is really tough for incumbent competitors. She would be on the sidelines with this.

(Top Pick Jun 21’16, Up 11.95%) This is his sore one. He is hanging in, though. It is because of fears of food deflation. He sees this as a temporary blip. They have a pretty good brand of organics. They have this segment of food and it is not perceived as just for the elite. They have a great deal of market share.

He has a small position because it is one of the top market share grocers in the US. They have their organic line, private label, as a catalyst for growth. This could help propel margin expansion. Find it in the low $30s or below. There may be some fund flows out of this stock in some funds and this would create an opportunity.

The 2^nd largest grocer in the US, only behind Walmart. Trading at a big discount to Walmart. There has been pressure on the company, but it is trading at only 11.5X earnings. Dividend yield of only 1.8%, but have grown it at a double-digit rate for the past decade. Also, only pays out about 20% of earnings. They’ve also done very strategic acquisitions throughout the US to buy smaller regional supermarkets. He likes this a lot.

The grocery business is tough. Razor thin margins and very competitive. Food inflation is starting to fall back a little. This started to decline 5 months ago when there was changed guidance on the name, expecting things to fall off a little. This is also showing up in Canada. Also, he understands that Walmart had taken a lot of market share from them, not only in a general basis, but in very specific regional markets.

This is facing food deflation in the US as well as a more competitive environment. There is an impact across the sector. A phenomenal grocery store chain, and he likes it. Has a reasonable valuation.

He would stay away from grocery in general. A major factor is food deflation, but even if the gross margin of a grocery store were to remain constant, and selling prices are lower, they are delivering less growth margin dollars against the fixed costs. The other problem is that a lot of the profit pools of the grocery industry are really under assault. There are hard discounters coming into the US like Aldi, Richard selling natural foods at incredibly low prices, working on very low markups. (See Top Picks.)

Believes this is the biggest grocery store in the US. It off about 20% in the last little while. There is basically a lot of focus on food and cost inflation, and how are they going to successfully manage both and pass it on to the consumer. He prefers using his Cdn$ to buy a name like Loblaw’s (L-T). Kroger is trading at about 13X earnings with a yield of about 1.5%, and thinks they will manage through this. The kind of name you want to buy in this correction.

(Market Call Minute.) A little too expensive. A supermarket that is trading close to 20X earnings. Margins are traditionally extremely skinny in this type of business.

Gaining share the last few years. The market is worried about food price inflation. You will get double digit earnings growth. 14 times earnings and great dividend growth. These guys are great at execution.