Kroger, On A Hiring Binge, Is A Buy

Note: This idea involves risk. Talk to your financial adviser before doing anything. Also, I could be wrong about this.  

The current rally – which started in 1Q09 — is getting a bit long in the tooth.Not only is technical analysis arguing against purchasing equities, so is the current earnings environment, where overall corporate profits have declined in 4 of the last 5 quarters. Finally, recent economic numbers, such as last months’ below estimate 160,000 job gains or the weak 1Q GDP print – add to the concern. While recession calls are premature, the macro-environment is weak.

At minimum, stock analysts should look for companies in economic sectors with steady growth profiles such as the food and beverage sectors:

In the last 20 years, there are only two periods of contraction, each lasting less than a year. These sales are the backbone of the consumer staples sector, represented by the XLP ETF. Below are three charts that show this ETF’s technical picture: 

Although both the daily chart (top chart) and weekly chart (middle chart) recently printed negative candles, they remain in uptrends. The ETF’s advance/decline line (bottom chart) is rising.   

The Kroger Company (KR) is the largest grocery store by market capitalization; it is slightly over 3 times the size of its nearest competitor Whole Foods.Kroger’s growth is consistent: their 5-year average revenue growth rate is 6%-7%, while the 10-year average is a solid 6%. Due to razor thin net margins that average between 1%-1.5%, the company needs to aggressively manage its operations. Thankfully, their cash conversion cycle dropped from 10.75 days in 2010 to 7.28 in 2015, their inventory turnover ratio has been a consistent 14-15 for the last 4 years and the days of inventory on hand has been a steady 24.2-25.2 since 2012. These numbers show a strong organization-wide discipline, which the company’s thin margins and hyper-competitive sector require.