3 Grocery Stocks to Sell Before Amazon Slaughters Them

The e-commerce giant, along with fierce competition, will make grocery stocks a mighty tough proposition

By Josh Enomoto, InvestorPlace Contributor

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It’s not every day that grocery stocks garner headlines. We shop for some food, maybe pick up some meds and we go home. But e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) jolted the entire sector mid-month when it announced that it would buyout Whole Foods Market, Inc. (NASDAQ:WFM) for $13.7 billion in cash.

3 Grocery Stocks to Sell Before Amazon Slaughters Them
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While WFM naturally shot skyward, all other grocery stocks tumbled. Although the online retailer signaled its intent via Amazon Go, very few saw the Whole Foods takeover coming.

According to InvestorPlace writer Robert Martin, Amazon Go is “a no-line, no-checkout theme with little human interaction, where technology would help speed orders of foods and other goods.” Competitors expected AMZN to bring a new twist to the grocery market, not take it head-on.

Then again, Amazon is the epitome of evil genius. They didn’t buy just any old grocer; they specifically sought out Whole Foods Market because of its marketability and perceived high-end specialization. In other words, WFM is an “experience” store, much like Amazon Go. This distinction separates Whole Foods from most other grocery stocks.

Now, grocery stores not only have to worry about heightened competition, the market itself is extremely saturated. Too many players compete on the field, which leaves little room for progress. No longer can grocery stocks rely on volume to make up for thin margins. If they want to succeed, they will have to do so against every tangible (and intangible) metric you can think of.

The downside to a high barrier of entry is that once a whale swims in, it’s nearly impossible to kick them out. With that in mind, here are three grocery stocks that Amazon will try to sink.

Grocery Stocks to Sell: Sprouts Farmers Market Inc (SFM)

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If I had to pick a survivor among grocery stocks, it would be Sprouts Farmers Market Inc (NASDAQ:SFM). This is hardly what I would call a prescient pick. With a year-to-date return of over 16%, SFM is not only outperforming the broader markets, it’s also the only grocer in this list in positive territory.

But even with this advantage, it’s a tough road for SFM.

Assuming that Amazon and Whole Foods doesn’t fall prey to antitrust laws as per InvestorPlace contributor Dana Blankenhorn’s argument, Sprouts will have to contend with two extremely popular brands. Both specialize in the intangibles of customer satisfaction, while Amazon has a substantial foothold in the online grocery market. Synergy opportunities abound, which troubles SFM and its shareholders.

However, Sprouts is also a high-end grocery specialist, which theoretically gives it a fighting chance against Amazon’s intrusion. SFM features comparatively high profitability margins, which are superior to Whole Foods. It too has a wide fan base that eagerly consumes its products. Because it has the best chance among the grocery stocks to weather the Amazon storm, SFM may have bottomed out. If so, it’s a great chance for speculators to get in.

But for those that are risk-averse, I’d stay away. Amazon is on a roll. You just can’t say that about the grocery industry.

Grocery Stocks to Sell: Kroger Co (KR)

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I’m not a big fan of Kroger Co (NYSE:KR); at least, not in the sense of survivability against the Amazon onslaught.

Grocery stocks face competition up and down the supply chain, from lower-tier names like Dollar Tree, Inc. (NASDAQ:DLTR) to higher-end names like Whole Foods. Amazon just adds another obstacle that KR doesn’t need.

After a mixed Q1 earnings performance and terrible full-year guidance, KR stock was beaten six ways to Sunday. I can’t say that I’m surprised. Outside of the earnings report, unemployment has dropped significantly since President Trump took office. Such economic trends work favorably towards high-dollar, high-margin grocery stocks like Whole Foods and Amazon.

The flipside to this is another article forwarded by Dana Blankenhorn. His analysis indicates that “consumers are battening down the hatches, searching for value.” In that case, Kroger’s portfolio of value brands would soak up demand that Amazon missed.

While I dearly respect Mr. Blankenhorn, I’ve never been great at discerning when the investment masses are “right” or “wrong.” Instead, I look to market psychology. Right now, all I see is a falling knife. KR stock has fallen below every reasonable support line. It’s in a no-man’s-land that could be a phenomenal buy, or a devastating loss.

Given the weight of competition that grocery stocks are under, KR is simply too risky for my taste.

Grocery Stocks to Sell: Smart & Final Stores Inc (SFS)

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With either Sprouts or Kroger, I readily admit that some salvageable value exists. With Smart & Final Stores Inc (NYSE:SFS), I have zero incentive to hedge.

SFS stock isn’t any good, and as President Trump might say, “everyone knows it.” In a nutshell, SFS is too small and too slow to have even a glimmer of a chance against the Amazon albatross.

We Americans love a good comeback story; just don’t expect it from Smart & Final.

On a YTD basis, SFS stock is down more than 39%, while it has hemorrhaged 45% over the trailing year. The consequence of this dramatic selloff is that the retailer’s market capitalization is now $640 million. Such a figure is simply not going to cut it when they’re competing against stalwarts like Wal-Mart Stores Inc (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST).

The problem is differentiation, or lack of it. No one can beat the bulk value of Costco, while one-dollar stores cover the bottom spectrum. SFS is getting walloped by its big-box competitors, and grocery stocks like Kroger will show them no mercy.

Ultimately, SFS is coming to a gunfight armed with spitballs. I wrote about my concerns with the organization and its competitive landscape back in March 31. Since then, shares have lost 29% after a brief run-up. It’s obvious those concerns weren’t addressed, and now with Amazon, it’s just too late.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/3-grocery-stocks-to-sell-before-amazon-slaughters-them/.

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