Kroger (KR): A Winning Long-Term Defensive Value Play

Investing in undervalued stocks seems like a no-brainer for investors in search of outsized returns, but it tends to come with a drawback — usually in the form of having to wait a long time for the market to realize the fair value. To boot, tickers like those don’t fare any better than their growth stock counterparts in market-wide downturns.

While such a downturn seems less likely than it was a few months ago, that doesn’t mean that we’re out of the woods just yet.

So — how do you find a bargain that’s actually worth pursuing? Well, of course, we need an attractive valuation — but seeing as we're still in uncertain macro conditions, a defensive sector pick, preferably one with a size advantage and history of outperformance, would be best.

I wager you’ve read the title — so let’s just dive in. Kroger (NYSE: KR) fits the bill, as it stands to benefit from an increase in non-discretionary spending should a recession occur — and our quant rating system, Zen Ratings, suggests that it’s the clear-cut choice. Here’s why…

Our system tracks more than 4,600 stocks, and evaluates them based on 115 factors that correlate with above-average returns. The top 5% are given a Zen Rating of A, and backtesting has shown that the stocks that qualify have provided average annualized returns of 32.52% since the early 2000s.

As it happens, Kroger stock ranks in the 95th percentile overall — so it has a Zen Rating of A.

However, since we’ve outlined our exact criteria, we have to go into detail — thankfully, each Zen Rating is a composite score of 7 Component Grade ratings, which cover specific areas.

Let’s start with Value. KR is currently trading at a price-to-earnings (P/E) ratio of 19.44x. The wider market average is currently 30.71x. Moreover, the Grocery Store industry’s average is 22.47x — so Kroger is trading at an attractive valuation even relative to peers. In terms of its Value Component Grade rating, Kroger stock ranks in the 80th percentile of the equities we track.

Speaking of the Grocery Store industry — it has an Industry Rating of A, and consists of 11 stocks. It’s actually the 8th highest-rated industry out of 145 at the moment. KR is currently the 3rd highest-rated stock within the industry, but it blows the competition out of the water when it comes to market cap, as it’s also the largest business in the industry.

As you well know, Growth and Value are usually at odds with one another — but Kroger actually ranks higher in terms of Growth than Value — in the 82nd percentile. That’s also how it ranks when it comes to Financials.

Thus far, we’ve established a strong balance sheet, great growth prospects, and an enticing valuation.

But will Kroger continue to outperform? Yeah — I think so, and I’m going to outline why.

First — past performance. The company is on a hot streak — having beaten earnings per share (EPS) estimates for 16 consecutive quarters. That’s four years of outperformance — rain or shine.  

Next up, we have the stock’s Artificial Intelligence Component Grade rating. It’s derived from the findings of a neural network trained on two decades of fundamental and technical data. And when it comes to this rating, KR ranks in the top 9% of the stocks we track.

Last but not least, we have insider trading. Well, not insider trades per se — those are illegal — but insider transactions. 

In the past 12 months, 39.77% of these transactions have been rated Buys. That’s quite telling — particularly when you factor in that key personnel usually receive a lot of their compensation in the form of equity, and tend to regularly execute employee stock options, which they then have to sell.

As I said, that’s quite telling — key investors and company personnel, those with the best lay of the land, seem quite bullish. Side note — even very promising stocks often have a ratio of 100 - 0 in favor of selling — I know that 39.77% might not seem like a huge vote of confidence, but you’re gonna have to trust me on this one — it is.

Finally, we have the star of the show. KR has a Beta of 0.18, so it’s incredibly stable — and ranks in the top 7% of stocks with regard to Safety.

Right now, KR seems like the perfect long-term pick to shore up a portfolio. If things go south, it stands to benefit — but even if we come out of everything without a recession, there’s still a strong reason to believe Kroger will continue to outperform. And lest we forget — all of that is at a bargain price.

—> Click here to research KR. If we’ve piqued your interest, you might also want to check out our Most Safe Stocks to Invest In & Buy screener

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