3 trades to win with this grocery retailer, Kroger up more than 5%

  • Shares of grocery retailer Kroger are up more than 5.5%.

  • KR may continue to outperform in current high inflation environment

  • Long-term investors might consider buying KR shares at current levels

  • For tools, data and content to help you make better investment decisions, try InvestingPro

Shareholders of the grocery retailer Kroger (NYSE:) have seen the value of their investment increase 32% in the last 12 months. By comparison, the {{166|S&P 500}} has lost more than 16.5% so far in 2022.

Source: Investing.com

On April 8, KR shares broke above $62 and hit an all-time high. Now, they are changing hands at $47.90. The stock’s 52-week range has been $35.91 to $62.78, while the market cap currently stands at $36.9 billion.

The Cincinnati-based grocery retailer operates more than 2,700 stores, including some 2,200 drug stores and 1,600 fuel centers. Kroger currently has an 8% market share among US grocery companies. Readers will be interested to know that, with a 25% market share, Walmart (NYSE:) leads the industry.

Kroger currently has four different formats: Grocery Stores (including Kroger, Ralphs, Dillons and QFC), Multi-Department Stores (Fred Meyer), Discount Stores (Food 4 Less and Foods Co), and Market Stores (such as Dillons Marketplace, Fry’s Marketplace and King Soopers Marketplace).

Analysts agree that Kroger’s e-commerce, pickup and delivery options continue to generate inflation-resistant revenue. Meanwhile, long-term shareholders have enjoyed years of returns and dividend increases. The current price supports a dividend yield of 1.73%.

How the recent metrics arrived

Kroger released data for the fourth quarter and full year 2021 on March 3. They reached $33 billion, an increase of 7.5% year over year. Identical sales without fuel rose 4% to $28.9 billion. Adjusted net income was $566 million, or 91 cents per share, compared with an adjusted loss of $77 million, or 81 cents per share, in the year-ago quarter.

On the results, CEO Rodney McMullen stated:

“Our strategy of leading with fresh and accelerating with digital propelled Kroger to record performance in 2021, in addition to record results in 2020.”

For the full year 2022, management expects identical sales growth to be between 2% and 3%. Meanwhile, adjusted EPS is expected to be between $3.75 and $3.85.

Before the fourth quarter results were released, KR shares were changing hands around $50. At the time of writing, it is at $48.60, down about 3%.

What to expect from Kroger stock

Among 25 analysts surveyed by Investing.com, KR shares are rated “neutral” with a 12-month mid-price target of $55.14 for the stock. This move would suggest an increase of more than 13.5% from the current price. The target range is between $38 and $75.

Consensus Estimates of Analysts Polled By Investing.com.

Consensus Estimates of Analysts Polled By Investing.com.

Source: Investing.com

Also, based on a number of valuation models, including those that may consider price-earnings, price-sales or terminal values, the median fair value of KR shares on InvestingPro stands at $66.31.

Valuation Models By InvestingPro.

Valuation Models By InvestingPro.

Source: InvestingPro

In other words, the fundamental valuation suggests the stock could rise more than 36.5%.

Currently, KR’s price-to-earnings, price-to-sales and price-to-book ratios are 21.3x, 3.7x and 0.3x. Comparable metrics from its peers stand at 19.4x, 2.3x, and 0.4x. These figures reveal that KR shares may be slightly overvalued at current prices.

As part of short-term sentiment analysis, it would be important to also look at Kroger options implied volatility levels. Implied volatility typically shows traders the market’s opinion of a security’s likely movements, but does not predict the direction of movement.

The current implied volatility of KR is approximately 19.5% higher than the 20-day moving average. In other words, Kroger’s implied volatility tends to rise while the options markets suggest increased turmoil.

Our expectation is that KR shares will build a base between $45 and $55 in the coming weeks. Afterwards, stocks could start a new leg higher.

Add KR shares to portfolios

Kroger bulls who are not worried about short-term volatility might consider investing now. His target price would be $55.14, based on the target provided by analysts.

Alternatively, investors could consider purchasing an exchange-traded fund (ETF) that holds KR shares as a holding. Some examples are:

  • John Hancock Multifactor Consumer Staples (NASDAQ:) ETF (NYSE:)

  • Principal Millennials ETF (NASDAQ:)

  • iShares Focused Value Factor (NYSE:)

  • Invesco Dynamic Food & Beverage ETF (NYSE:)

Finally, investors who expect KR shares to rally in the coming weeks might consider selling cash-backed put options on Kroger shares.

Most options strategies are not suitable for all investors. Therefore, the following analysis of the KR stock is offered for educational purposes and not as an actual strategy to be followed by the average retail investor.

Cash-backed put options on KR

Price: $48.60

This bullish trade could be especially attractive for those who want to receive premiums (from selling put options) or possibly own KR shares for less than their recent market price of $48.60.

A put option contract on KR shares is the option to sell 100 shares. Cash-backed means the investor has enough money in their brokerage account to buy the security if the stock price falls and the option is assigned. This cash reserve must remain in the account until the option position is closed, expires, or assigned, meaning ownership has transferred.

For example, if investors were to sell the $45 put option that expires on July 15, they could collect about $1.85 in premium.

Therefore, the maximum return to the seller on expiration day would be $185, excluding commissions and trade costs, if the option expires worthless. But if the put option is in the money (meaning Kroger stock is below the $45 strike price) at any time before or at expiration on July 15, this put can be assigned.

The put option seller would then be required to purchase 100 shares of KR at the put option strike price of $45 for a total of $4,500 per contract.

If the seller of the put option is assigned Kroger stock, the maximum risk is similar to that of owning the KR stock. In other words, stocks could theoretically drop to zero. But this risk is partially offset by the KR option premium received ($185 per 100 shares).

The breakeven point in our example is the strike price ($45) minus the option premium received ($1.85), or $43.15. This is the price at which the seller of the KR put option would start to incur losses.

Selling cash-backed put options is a moderately more conservative strategy than buying a company’s stock (in this case, Kroger stock) outright at the current market price.

Investors who end up owning KR stock as a result of put sales may also consider setting up covered call options on Kroger to increase the potential return on their stock. Thus, selling KR cash-backed put options could be considered the first step in owning Kroger stock.

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