Don’t Be Swayed by the Upgrade. Kroger Stock Is Not a Buy.
Kroger (NYSE:KR) shares are climbing today, adding to their gains of recent days, after Bank of America upgraded Kroger stock to “buy” from “neutral.” While Kroger may be a good stock to buy for short-term traders, those with a time horizon 0f more than a few weeks would likely not benefit from buying the shares.
Bank of America anticipates that food inflation will persist “at least through” the year, Seeking Alpha reported. As a result, the firm predicts that the demand for products from retailers that offer “variety” will rise. Bank of America presumably puts Kroger in that category.
Bank of America also praised Kroger for what it sees as the supermarket chain’s large size, “price leadership, strong execution, digital outlook, and developing ecosystem that unlocks monetization/higher margin alternative profit stream opportunities.” Higher inflation will enable the company’s financial results to surpass analysts’ average outlook for an extended period of time, the firm predicted.
It’s true that, in the words of Supermarket News, “Supermarkets have traditionally done well during periods of food inflation.” But as I wrote in a recent, prior column, “Russia is looking to concentrate on the eastern part of Ukraine and sources are implying that Vladimir Putin is looking to end the war by early May.”
Since the war is a major reason for high food inflation, the narrowing of the conflict and a likely cease-fire in a few weeks should cause food inflation to drop going forward. Consequently, Kroger and Kroger stock probably won’t get as much help from food inflation over the long term as Bank of America expects.
Also worth noting is that, with fears of the coronavirus greatly easing in the U.S., 70% of Americans are “plan to take a leisure trip in the next 12 months,” NerdWallet recently reported. That’s not good news for Kroger and its peers, since people generally eat mostly at restaurants when they travel.
Finally, the fears of a recession have pushed up defensive stocks lately, and I’d generally put Kroger in the latter category. But I tend to agree with the points recently made by Morningstar analyst Preston Caldwell, who persuasively argued that the economy is likely to stay “strong” for some time.
Given the points that I made above, I think that Bank of America’s upgrade of Kroger stock is late, and I urge those with time horizons of more than a few weeks to avoid the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
