This week’s pick is: Kroger Company (The) (NYSE:KR)
The best value stock finds usually come from mundane or “unsexy” industries.
Technology, biotech, and big Wall Street names like Goldman Sachs or JP Morgan typically dominate headlines and draw investors attention.
But that leaves plenty of other strong companies to beat expectations and steadily grow while remaining unnoticed. And a stock no one is paying much attention to can often be a stock that’s trading off of its true intrinsic value.
One company in the consumer staples sector has a built-in inflation hedge along with an undervalued stock price giving investors a great discount pick-up for any portfolio.
A Regional Consumer Favorite And Undervalued Stealth Pick-Up
The Kroger Co. (KR) is a $41.7 billion grocery store chain with roughly 2,800 storefront locations across 35 states. It is the largest supermarket chain in the US by revenues and the second-largest general retailer behind Wal-Mart.
The company reported a spectacular earnings beat of $0.91 per share for the fourth quarter compared to the analysts estimates of $0.74 per share.
Revenues climbed to $965 million lead by the impressive digital sales two-year stack of 105% growth.
Earnings estimates were revised upwards after the company provided guidance for 2022 to an adjusted EPS estimate between $3.75 to $3.85 per share.
One of the catalysts that could drive Kroger’s stock higher is its effectiveness as an inflation hedge. Since the grocery giant sells basic goods and services to consumers, it can pass on higher costs with relative ease.
The stock was upgraded twice in April. BofA Securities changed its recommendation from “neutral” to “buy” and raised its price target from $61 per share to $75 per share, while Exane BNP Paribas’ outlook improved from “underperform” to “neutral” and given a $60 per share price target.
The Fundamental Story
The stock trades very cheaply at just 15 times earnings compared to the food retailers and wholesalers industry average of 30 times earnings.
The long term estimated EPS growth rate of around 6% gives it a PEG ratio of 2.5 – a relatively neutral signal to investors, but doesn’t indicate that the stock is overvalued.
It comes with a decent 1.5% dividend yield as well which helps provide a buffer against downside movements, while the low beta of 0.46 makes it a low-volatility investment as well.
Kroger’s chart shows a relatively stable pattern aside from a leap up back in early March.
Right now, the 20-day SMA is trending above both the 50-day and 200-day SMAs, while a classic hammer pattern in the candlesticks from last week is indicative of future bullishness.
The RSI of 48 doesn’t indicate any risk of being oversold or overbought at the moment which means there is plenty of opportunity to buy into this stock right now.
The Bottom Line
Based on Kroger’s full year EPS estimates, this stock should be fairly valued at around $65 per share – a gain of more than 16% from its current price point.
Anyone who is concerned about inflation pressures and market volatility will be interested in picking up this ideal portfolio fit.