Consolidation May Boost Some Grocery Stocks

Amazon.com, Inc (AMZN) made a grand entrance into the grocery business earlier this month when it announced a $13.7 billion buyout bid for Whole Foods Market, Inc. (WFM). But even though Amazon has massive disruptive potential in the grocery industry, Wells Fargo analyst Zachary Fadem says there is still plenty of room for long-term gains among a handful of select grocery stocks.

According to Fadem, investors must accept that Amazon will change the dynamic of the entire industry, particularly when it comes to pricing.

While large-scale competitors such as Wal-Mart Stores Inc (WMT), Costco Wholesale Corp. (COST) and Kroger Co. (KR) are best positioned to compete with Amazon on prices, they could all be forced to endure margin contraction in the event of a pricing war.

It may seem as if smaller grocers would be at a huge disadvantage in this scenario, but Fadem believes share prices of smaller grocery companies could get a boost as more of the larger competitors consider scaling their business via buyouts.

Fadem says Walmart outbidding Amazon for Whole Foods is “possible but unlikely.” However, he says Wells Fargo’s top grocery stock pick, Sprouts Farmers Market (SFM), is a prime buyout target.

“With increasing potential for long-term grocery industry consolidation, we view SFM as a likely candidate … which in our view raises SFM’s valuation floor, despite a heightened competitive environment,” Fadem says in a research note.

But while investing on buyout speculation alone can be a risky endeavor, Fadem says Sprouts’ fundamentals make it the most attractive play in the grocery space regardless of a buyout bid.

“Even absent a takeout, we believe SFM remains well-positioned with differentiated and expanding product offerings, focus on fresh/value (attractive sub-segments) and growth opportunities from private label, prepared foods and digital initiatives,” Fadem says.

In addition to Sprouts, Wells Fargo is bullish on food distribution stocks Sysco Corp. (SYY) and US Foods Holding Corp. (USFD). Despite the new competition from Amazon, Fadem also says Kroger is attractive as a long-term value play given it currently trades at a 11.3 forward price-earnings ratio, well below its historical valuation.

Fadem is…

Click here to continue reading

Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common SenseI don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!