When an investor starts putting money to work in the equity markets, the probability is that the constituents will be well renowned such as BMW, Apple, Starbucks, Ryanair etc. People feel comfortable with these names because they make part of their everyday life and have seen an improvement in the business over the years.
A success story reduces risk aversion and increases one’s confidence in the company resulting in a greater probability that the stock will be added to a portfolio.
If you just started experimenting in capital markets, I agree that this way of choosing your constituents is a good way to go about it. Obviously, an attractive valuation should be the reason to close the deal but a feel good factor is also a must.
But for those investors who have been investing in the markets and are confident with their stock picking skills, moving away from their comfort zone would result in a market full of opportunities in new names which they have never heard of before.
Kroger is one of them. The Company is an American retailer founded by Bernard Kroger in 1883. It is the country's largest supermarket chain by revenue, the second-largest general retailer behind Walmart.
My interest in Kroger started when I was analysing Walmart and Macy’s. I went through the companies in the same sector and Kroger was one of the companies which was being flagged by my model as a buying opportunity.
A new name in the retail sector in the US was a good basis to get interested in the stock. These are some of the reasons why I think Kroger should be added to a portfolio:
I like what they do!
Kroger is different from its competitors because it’s a one stop shop. When you go to a Kroger department store, there is a high probability you’ll be able to sort all your shopping done from just one store. Whether its clothing, groceries, pharmaceuticals or even fuel for your car, Kroger caters for all your needs.
The stores also adapt to different cultures in different states to be able to keep its competitive advantage across the board.
No Chinese dependence in this success story
I like the fact that they are only exposed to the US. Investors are worried about a slowdown in China which is creating higher volatility in the equity markets. The fact the Kroger is focused on the US economy takes out the noise we see in many other companies we follow.
With economic growth in the US picking up, Kroger is well positioned to benefit from an improvement in the US economy.
Focus on increasing market share
Management is pursuing a ‘fill-in markets strategy’. This involves investing capital to grow square footage, primarily through new and expanded stores and remodels, in order to increase market share.
The merger with Harris Teeter and Vitacost has opened new markets that present meaningful growth opportunities for Kroger.
The model also works because management sees an increase in customer loyalty over the years.
Attractive valuation
We see potential upside in the stock without even having to be aggressive in our forecasts. With a modest increase in sales and margins over the next three years, I expect the shares to go above the $40 price level and this is factoring in a discount rate of 9%.
Conclusion
Kroger is well positioned to continue to grow its top line and margins in the years ahead. The business model coupled with an attractive valuation and a growing US economy make Kroger a decent constituent in a well-diversified portfolio.
Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.