October’s Theme – Defense Travels

We continue the week with football themes which seem apropos with the yo-yo stock market this week.

Is this a correction or even an entry into a bear market, or just a temporary bump in this 5-year bull market? It’s hard to make sense of things when industry icon, Carl Ichan (ok that pun is a lay-up), says in one breath Apple, Inc. (NASDAQ – AAPL) is worth two times more than current trading price, then also states we are entering a bear market ‘for sure’. The time has come to play some defense with consumer staples.

The Kroger Co. (NYSE – KR -$53.26) has quietly become en vogue and appears on the verge of another breakout. The Cincinnati based retail chain is primarily a grocer with its own generic brands as well that also sells general merchandise items comprising apparel, home fashion and furnishings, electronics, automotive products, toys, and fine jewelry. There are a few reasons why this stock stands out in this sector. First, the Company has initiated a massive remodeling effort to clean up and modernize the stores. Additionally, the Company made new agreements with some Ohio unions last week. These items seem to indicate the long term outlook appears to be the priority at the C-level.

Below is a 1-year chart for KR which illustrates a price level comfortably above the 100 day average.

1-Year Price Chart for KR with 100-day SMA

(Source: BigCharts.com)

The price-earnings valuation is also a positive as the forward vs. trailing P/E is 14 vs. 17. Additionally, the 5-year PEG of 1.4 indicates a great growth story. In an industry where margins are razor thin, Kroger has an operating margin of 3% which is in line with the industry norm. Finally, the short float of 2.11% indicates that there not many doubters on the stock.

We think KR, although somewhat out of our normal price range, could be a solid defensive play over the next several months while the market turmoil settles out. Another 15% jump by sometime in 1Q15 is an achievable target.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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