KR: Is Kroger a Buy After Dropping 20% in Three Months?

Kroger (KR) has been sliding since hitting $36.60 on September 1. The stock is now down to $30.79, the same level it traded at in early April. Investors have clearly taken some of their profits off the table. Let’s take a look at whether KR is worthy of your investing dollars.

KR by the Numbers

KR is trading $7 away from its 52-week high and $4 away from its 52-week low. The stock pays a dividend yield of 2.33%. KR currently has a low forward P/E ratio of 9.22, meaning it could be undervalued. However, KR is a grocer as opposed to a hot tech stock with extensive growth potential, so the comparably low forward P/E ratio is somewhat justified.

Analysts paint a rosy picture for KR’s future, setting an average price target of $33.82, indicating an upside potential of 10%. However, of the 13 analysts who cover the stock, all of them consider it a “Hold,” which isn’t exactly the strongest vote of confidence.

Take a look at KR’s POWR Ratings, and you will find the stock has “D” grades in the Peer Grade and Trade Grade components, a “C” grade in the Buy & Hold Grade component, and a “B” Industry Rank. KR is ranked 11th out of 18 publicly traded stocks in the Grocery/Big Box Retailers segment. The stock has returned 8.51% so far, year-to-date price. Over the past three years, KR has returned 17.96% and has lost 5.02% over the last six months.

KR is Recession-Resistant

Part of the appeal of investing in KR at the current moment in time is the stock’s strength during economic contractions. KR sells what people need regardless of the state of the economy. People will buy food, pharmaceuticals, and gas even if the economy is mired in a deep and lengthy trough in 2021 or beyond. Furthermore, KR same-store sales increased 2% this past year and were on the rise in the preceding years. The company’s third-quarter comparables popped nearly 11% thanks to a hike in grocery shopping during the pandemic.

Add in the fact that KR’s operating cash flow was nearly $6 billion across the initial nine months of the year ($3.8 billion of free cash flow after the $2 billion worth of capital expenditures are accounted for), and you have even more reason to be bullish about this stock. Furthermore, it is worth noting KR has hiked its dividend payout for 14 straight years.

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Slow and Steady Wins the Race

If you are still on the fence about whether KR is worth investing in, consider the fact that Warren Buffet is invested in the stock. Buffet’s Berkshire Hathaway (BRK.B) purchased 19 million KR shares in Q4 2019 and followed that up with six million more shares. All in all, Buffet’s investment accounts for slightly more than a 3% stake in the popular grocer.

Though KR is a comparably slow-growing company, it is likely to follow through on its dividend payment. Add in the fact that the company can boost shareholder value through the repurchase of shares with its cash-on-hand, and investors have all the more reason to feel good about owning this stock. It is also worth noting KR’s Simple Truth plant-based products are taking on Beyond Meat (BYND) with considerable success, selling quite briskly during the pandemic. This trend bodes well for KR’s future as more people transition to vegetarianism and veganism.

KR: Buy, Sell, or Hold?

There is certainly the potential for KR to decline in the year ahead as the company might struggle to put up sales compared to those in 2020 when the pandemic was in full swing. This is not the type of stock investors buy with the goal of making money in the short-term. As long as you are investing for the long haul, KR is a solid investment. However, if your focus is on making money in the near term, you can find better opportunities than KR.

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KR shares . Year-to-date, KR has gained 8.83%, versus a 16.23% rise in the benchmark S&P 500 index during the same period.

About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management. More...