Shares of Kroger (NYSE:KR) have already started coming under fire in 2019. While the S&P 500 is up 14.5% on the year, Kroger stock is down 11%. That’s not exactly a good way to start 2019 after a horrendous end to 2018.
Five years ago, KR stock seemed like a lay-up. It had a decent dividend, reasonable valuation and steady growth in a constantly in-demand industry.
Everyone needs food and therefore a well-run grocery outfit was seemingly a no-brainer investment. But come to find out, that doesn’t always pan out.
Here are three reasons to consider avoiding Kroger stock.
Secular Shifts
Kroger is doing its best to keep up with the technology disruption in the grocery industry. This should help keep it defensible as other competitors also increase tech-friendly approaches to grocery stores.
But Target (NYSE:TGT), Costco (NASDAQ:COST) and now Amazon (NASDAQ:AMZN) via its regular business and its Whole Foods acquisition have seemingly done a better job at moving faster. Throw in increasingly faster delivery options, meal-prep startups and a slew of other options, and KR stock is being left by the wayside.
Kroger is a really tough one for me, because on paper it’s a great investment. But the stock price is telling us something and as others innovate faster and as a lack of food inflation hinders its margins, it’s clear that Kroger is struggling to keep pace.
Valuation Isn’t Enough
Kroger stock may trade at 11 times earnings and yield 2.2%, but is it enough? 11 times earnings is pretty cheap, but Target has a stronger dividend and better growth with a reasonable valuation. Cheap doesn’t always mean better and we don’t have to look much further than the automakers to make that case.
While some gravitate toward low-valuation stocks, I only use as one part of the catalyst. In fact, many other better performers trade at a higher valuation. For instance, Costco, Target, Amazon and Walmart (NYSE:WMT) all have a higher valuation than Kroger stock, and all of them have out performed KR over the past year.
In fact, Kroger’s 1.7% gain over the past 12 months badly lags even the second-worst performer, Walmart, and its 10.3% gain. Costco is up almost 30% in the last year. None of these stocks except for Kroger are negative year to date, while Kroger is also last on the six-month, three-year and five-year timeframes.
Simply put, a low valuation is not reason enough to own Kroger.
Trading Kroger Stock
Click to Enlarge
Kroger has perhaps been one of the biggest warning signs in this whole debacle. After a late-2014 surge, KR has been nothing but trouble. And keep in mind, that’s almost five-years in the making!
At some point, the stock is bound to rally. It’s too good of a company to be left behind forever. And unlike the low-valuation automakers, consumers need to buy food every week to stay alive. This gives some “survival” demand for a company like Kroger.
That said, I’m struggling to get bullish based on these charts. Kroger stock is about $1 above its 2018 highs. If this level fails to support KR stock, then $20 is back on the table. I don’t think Amazon will ruin Kroger’s business model overnight, but it’s not making life easy when it comes to the stock price.
Amazon’s announcement last month on a private-label grocery concept blasted Kroger stock below $27, a key level on the long-term charts. The 200-week moving average is rolling over and acting as resistance, while Kroger clings to the backside of prior downtrend resistance.
A bounce could ensue and while a run to $29 would be a healthy return, I think that about caps the upside.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMZN.
