Grocery-store stocks were up about 44 percent in 2013 as of press time. Chuck Cerankosky of Northcoast Research says anticipated economic growth in 2014 means that consumers will continue to trade up to more-expensive food products, which boosts grocery-store revenue. Further, Kantar Retail, which is an analysis and consulting firm for the retail industry, expects that grocery stores will capture almost 20 percent of all the growth in consumer spending through 2018.
A good measure of evaluating grocery-store stocks is to target those that have growing sales per square foot, he advises. You typically can find this data in the company’s quarterly and annual filings. To detect companies that have too much debt, he says, look at the financial statements for an interest coverage ratio (a ratio of cash flow to interest costs) of 5:1 or better.
Cerankosky likes Kroger (NYSE: KR; Price: $42.66), which operates in 31 states under a variety of brands because of how well that it customizes its product selection to produce loyal customers. Cerankosky also likes Safeway (NYSE: SWY; Price: $34.52) for its steady cash flow compared with the rest of the industry. Safeway’s announcement in fall 2013 that it would close unprofitable Dominick’s stores only will strengthen its cash flow, he says.