Anytime I analyze a stock as an investment opportunity, it must meet three critical criteria — fundamentals, technicals and what I like to call the intangibles. Each plays a role in a company’s future potential, and if it’s missing even one we’re better off moving on to the next stock.
I recently ran well-known grocery store operator Kroger Co (NYSE:KR) through my strict tests and the stock failed miserably on all accounts. Let’s take a closer look at why:
Drowning in a Struggling Industry
Fundamentals: KR earned $2.06 a share in 2016 and expectations for 2017 are for earnings of $2.12 a share. That’s a mere gain of 3% and is well below the S&P 500 average. Looking ahead, management anticipates earnings to fall to $1.98 a share in 2018 before we see a slight uptick to $2.03 a share in 2019.
The short-term fluctuations in a stock can be driven by a number of factors, but over the long term, a company must have fundamental drivers in place in order to succeed. Unfortunately, KR is lacking any such factor. Fail.
Technicals: The stock has been in a downtrend since late 2015, losing about half of its value along the way. In the same timeframe, the S&P 500 gained more than 20%. There is a clear lack of relative strength in the chart, and recently it’s gotten even uglier.
Two major gaps lower in June (circled) following the announcement that Amazon.com, Inc. (NASDAQ:AMZN) would purchase Whole Foods, which sent KR stock to a multi-year low below $20.50. The stock has attempted to rally over the past two months, but instead, it was hit hard again last week when the AMZM/WFM merger was approved. As a result, KR closed at its lowest level since 2014.
Kroger’s chart is one of the ugliest on Wall Street, and aside from an oversold rally here and there — none of which I expect to last — there is no end in sight to the weakness. Fail.
Click to Enlarge Intangibles: This third criterion is a little trickier to discern, as it represents the themes and catalysts that are changing the market and will be responsible for big gains down the road. Looking at the grocery industry, it’s clear that the WFM buyout has caused a major disruption that has not been good for other companies within the sector. Now that world-dominator AMZN is looking to take over how consumers purchase their groceries, all other competitors will have to quickly change their business models in order to keep pace.
Yes, there will be more than one player in the grocery store sector that survives. And yes, it could be KR. However, margins will be squeezed in a price war and many companies will have to reevaluate how they run their businesses on a daily basis. In the end, the intangibles could not be worse for the grocery industry or for Kroger. Fail.
So not only does KR fail on all three criteria, it fails badly. I’m avoiding the stock and would recommend you do the same.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.