Investing in grocery stocks is not the easiest way to make money in the market. These are notoriously competitive, low-margin businesses. With that said, grocery stocks were among the biggest winners during the global pandemic as consumers stocked their pantries and were forced to do more cooking from home.
Not surprisingly, many grocery stocks soared, particularly those who had BOPUS (buy online, pick up at store) or home delivery options. The consensus among analysts is that grocery stocks will “normalize” over the next 12 months as pandemic-level stocking will mitigate.
But that doesn’t mean that you should overlook the grocery sector entirely. There still looks like there is money to be made in this area. And while I could nudge you towards Amazon (NASDAQ:AMZN) or Walmart (NYSE:WMT) stocks, that would be disingenuous. Chances are if you’re looking to invest in either of those stocks you’re doing so for other reasons.
With that in mind, here are three more pure plays on the grocery sector that look to have an essential role in our economy moving forward.
The question on investors' minds seems to be whether Costco (NASDAQ:COST) will continue its exceptional rate of growth. At least one analyst suggests that the company will run into tough year-over-year comparisons to the pandemic-skewed numbers of 2020. And they’ll point to the stock’s price to earnings ratio of over 36 (its highest in about 10 years) as a sign that a selloff is coming.
That may all be true. But Costco’s subscription model and retention level which last quarter was over 90% means that the company should continue to post strong earnings and revenue even if it’s not quite at pandemic levels. Plus, if history is any guide, Costco is likely to institute a price increase for its membership fees.
That being said, the stock is trading near the high-end of its 52-week range, but shares are consolidating. Still, interested investors may want to wait for a more defined pull back before jumping on board.
To prove that stock picking is an imperfect science, I wrote back in March that Kroger (NYSE:KR) was a questionable buy. One reason for that outlook was that the stock, at the time, was hovering around five-year highs at a time when the economy was improving and consumers were likely to reduce their spending at grocery stores.
But KR stock has gone up since that point and part of this may be because Kroger is a stock that investors flock to in times of uncertainty. I think that is true, but also underestimates the underlying story for Kroger.
The grocery chain has made a significant investment to increase its omnichannel presence. And that is likely to remain a catalyst for the company as the economy moves forward. The company is expected to beat on earnings when it reports earnings on June 17. If it does, KR stock may leap forward. However, with the stock trading in the middle of its 52-week range, this may be a time to climb on board.
Sprouts Farmers Market (SFM)
Finally, I’m looking at Sprouts Farmers Market (NASDAQ:SFM) as a way to play the changing tastes of Americans. Sprouts has a small footprint that only numbers a few hundred stores nationwide. What makes the company an intriguing buy is its focus on “attribute-based” products. This includes an emphasis on ingredients that support consumers who adopt a paleo, keto or plant-based diet in addition to consumers who put a premium on organic foods.
While it’s true that other grocery chains are making more accommodations for these trends, the success of a business like Whole Foods shows that Americans will flock to specialty stores. That, combined with the company’s likely expansion (it plans to start increasing its store count by 10% starting in 2022) makes it an intriguing buy.
Before you consider Sprouts Farmers Market, you'll want to hear this.
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