Is Kroger the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Kroger (NYS: KR) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Kroger.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-Year Annual Revenue Growth > 15% | 6.5% | Fail |
1-Year Revenue Growth > 12% | 7.9% | Fail | |
Margins | Gross Margin > 35% | 22.4% | Fail |
Net Margin > 15% | 1.4% | Fail | |
Balance Sheet | Debt to Equity < 50% | 141.8% | Fail |
Current Ratio > 1.3 | 0.87 | Fail | |
Opportunities | Return on Equity > 15% | 22.9% | Pass |
Valuation | Normalized P/E < 20 | 13.38 | Pass |
Dividends | Current Yield > 2% | 1.7% | Fail |
5-Year Dividend Growth > 10% | 44.5% | Pass | |
Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just three points, Kroger leaves its shareholders hungry. In a low-margin business, Kroger continues to deal with strong competition and rising food prices, but it has posted some good success stories as well.
The grocery business has been tough lately. Traditional grocers like Safeway (NYS: SWY) have suffered from high gas prices, which have tapped shoppers' wallets and left less for supermarket spending. Similarly, with big retailers Wal-Mart (NYS: WMT) and Costco (NAS: COST) representing an ever-increasing pressure on traditional grocery stores, the industry faces big challenges.
But Kroger has answered the call. The company has proactively cut costs on everything from energy usage to product distribution. In addition, its decision to put gas stations alongside its stores has brought more tangible benefits to its loyalty program and added convenience for its shoppers. Those successes have prompted competitors like SUPERVALU (NYS: SVU) to mimic its lower everyday pricing policies.
Kroger will never have the premium attraction of Whole Foods (NAS: WFM) or Fresh Market (NAS: TFM) , but as a basic all-purpose grocer, it's getting the job done. If you want to own a stock in this tough industry, Kroger might not be perfect, but it's near the top of the list.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
Click hereto add Kroger to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.
At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.The Motley Fool owns shares of SUPERVALU, Whole Foods Market, and Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of Whole Foods Market, The Fresh Market, and Wal-Mart Stores, as well as buying calls on SUPERVALU and creating a diagonal call position on Wal-Mart. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
