In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2016. For this article, I will review the following Food Retail stocks:
- Andersons (NASDAQ:ANDE)
- Casey's General Stores (NASDAQ:CASY)
- Chefs' Warehouse (NASDAQ:CHEF)
- Costco Wholesale (NASDAQ:COST)
- CVS Health (NYSE:CVS)
- Fresh Market (NASDAQ:TFM)
- Ingles Markets (NASDAQ:IMKTA)
- Kroger (NYSE:KR)
- Natural Grocers by Vitamin Cottage (NYSE:NGVC)
- PriceSmart (NASDAQ:PSMT)
- Rite Aid (NYSE:RAD)
- SpartanNash (NASDAQ:SPTN)
- Sprouts Farmers Market (NASDAQ:SFM)
- SUPERVALU (NYSE:SVU)
- Sysco (NYSE:SYY)
- United Natural Foods (NASDAQ:UNFI)
- Village Super Market (NASDAQ:VLGEA)
- Wal-Mart Stores (NYSE:WMT)
- Walgreens (NASDAQ:WBA)
- Weis Markets (NYSE:WMK)
- Whole Foods (NASDAQ:WFM)
The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I removed any stock that had negative or flat (less than 2%) earnings growth during this time period. These stocks included:
- Andersons - (17.4% decline)
- Sysco - (43.8% decline)
- Village Super Market (9.07% decline)
- Wal-Mart Stores (1.88% increase)
- Weis Markets (17.7% decline)
I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat revenue growth (less than 2%) or a decline in revenue over the past two years. These stocks include:
- Casey's General Stores - (5.57% decline)
- Ingles Markets - (0.08% increase)
- SpartanNash - (0.27% decline)
My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1.5 to focus more specifically on fairly valued/undervalued stocks. These stocks included:
- Chefs' Warehouse - 5.61x
- Costco - 2.61x
- PriceSmart - 30.27x
- Sprouts Farmers Market - 1.86x
- United Natural Foods - 4.52x
- Whole Foods Market - 1.90x
The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.
|Fundamental Score||Value Score|
|Smart & Final Stores||6||3|
To determine the best stocks for 2016, I'm only taking into consideration stocks that have combined scores of 12 or higher. Doing this left me with the following remaining stocks:
- CVS Health
- Fresh Market
- Natural Grocers
My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. CVS Health was the only stock that had a decline in book value during this time period.
I then looked at the remaining stocks and only included stocks with earnings yields of 4% or higher in my final analysis. The only stock with an earnings yield under 4% was Natural Grocers.
My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2016. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.
For its last quarter, the company posted a 3.2% increase in revenue and a decline in earnings per share from $0.27 to $0.23 compared to the same period last year. The company expects full year results to see an overall increase in total sales, but expects comparable store sales to be down 2% to 2.6%. Comparable store sales for the last quarter were down 3.7% compared to the same period last year.
The company's stock has fallen a lot from its 52 week high of $42.09 as it currently sits at $21.83. With negative same store sales numbers, I don't see anything that will move this stock's price higher in the coming months and I don't expect it to perform very well in 2016.
For its last quarter, the company posted a 0.4% increase in revenue and an increase in earnings per share from $0.36 to $0.43 compared to the same period last year. The company's total sales were negatively impacted by lower fuel prices, but excluding fuel, total sales increased 5.5%. More importantly, same store sales increased as well.
The company increased its full year earnings guidance, something it did last quarter as well, and continues to perform well. With a strong balance sheet, a growing dividend, and a fairly priced stock, I believe that Kroger will continue rewarding shareholders moving forward and I believe that the stock maintains the potential to see significant returns in 2016.
For its last quarter, the company posted a 45% increase in revenue and an increase in earnings per share from $0.81 to $1.03 compared to the same period last year. The company's same store sales increased by 5.8% and issued earnings guidance for 2016 sits at $4.30 to $4.55 per share.
Looking at the chart below, you can see that Walgreens remains more attractively priced than its number one competitor CVS.
Walgreens outperformed both CVS and the S&P 500 last year, and I believe that the company is poised to have a strong 2016 as well.
Out of this group of stocks, my top picks are Kroger and Walgreens. These are two stocks that seem to perform well year in and year out and have significantly outperformed the market in general historically.
Both stocks have strong revenue and earnings growth as well as a growing dividend. The key to these two companies is that they not only continue to deliver sales growth, but they do it at an organic level, which is huge for retail stores.
As always, I suggest individual investors perform their own research before making any investment decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.