Worried about the market's foreseeable future? If so, you're not alone. The S&P 500(SNPINDEX: ^GSPC) is down on the order of 16% from February's high on concerns that recently imposed U.S. import tariffs could take a lasting toll on the global economy. And maybe they will.
This dynamic doesn't necessarily make all stocks un-ownable, though. Indeed, what works against some tickers can be a boon for others.
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Investors looking to capitalize on the market's recent volatility might want to borrow an idea from Warren Buffett's Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) portfolio. Berkshire's been quietly sitting on a $3.7 billion position since late 2019, knowing the day of reckoning that would turn this ticker into a shining star was coming sooner or later.
That stock? Kroger(NYSE: KR). And despite its recent run-up through the marketwide headwind, shares of this mega-chain of 2,700 grocery stores can still be purchased for little more than a song.
Not expensive or overvalued -- for what it is
Some investors might disagree with that assessment. Kroger shares are up an impressive 24% from their January lull, reaching a record high earlier this month that's nearly 70% above its late-2023 low. Not only does this move leave the stock above analysts' consensus price target of $67.68, but it also pumps its trailing-12-month price-to-earnings ratio up to a little more than 16, and its forward-looking P/E ratio up to just over 15. That might be cheap compared to the S&P 500's comparable valuations of 21.4 and 19.8 (respectively), but for a slow-moving low-growth name like Kroger, it's a bit frothy.
Except, it really isn't all that expensive.
Although Kroger stock may currently be valued above its long-term norm, it's only marginally above its typical valuation. It's also arguable that the analyst community just hasn't yet had a chance to update their calls following a frenzied past couple of months.
More than anything though, as Buffett himself has said, "price is what you pay, value is what you get." Even if you feel like you're paying a bit of a premium for Kroger shares here, what they bring to the table in this current economic environment is most definitely worth it.
The anti-bearish case for Kroger is the bullish case
It's admittedly a cliché mindset, but consumer staples stocks like this one really do perform consistently in any environment, and they perform particularly well when worried investors are looking for safe havens -- as they are now. That's the chief reason this grocery stock's been so strong since February while everything else has been falling.
Worried that Kroger is just as vulnerable to tariffs as any other U.S. company? It's a legitimate concern. It's just not enough of a reason to make a point of steering clear of this stock. In fact, one could argue tariff-driven worries help this company more than they hurt it, for a handful of reasons.
First and foremost, although there's no specific confirmed quantification, the nature of the grocery business means most of what Kroger sells is produced, packaged, and procured within the United States. Fresh fruits and vegetables are a key but modest exception, and as the company's interim CFO Todd Foley explained during last month's earnings call, "Our merchandising and our sourcing teams are trying to be proactive and looking in those entities where we have the ability to diversify our supplier base."
Or, it can be put like this: Kroger's management doesn't seem overly worried about tariffs. It's still looking for top-line growth of between 2% and 3% this year to drive earnings of between $4.60 and $4.80 per share. That's just a tad shy of analysts' bottom-line expectations, but it's arguable the company is being conservative with its guidance given the uncertain environment.
Data source: StockAnalysis. Chart by author.
Then there's the bigger philosophical argument. That is, if tariffs truly are set to take a toll on American consumers' pocketbooks, look for consumers to spend less at restaurants and more in grocery stores. Even McDonald's -- the epitome of low-cost meals eaten outside of the home -- reported a 1.4% dip in its fourth-quarter same-store sales within the U.S., and that was before new tariffs were imposed.
Kroger's doubters could also point to disruption within the organization's top ranks as a reason to steer clear. Namely, early last month, CEO Rodney McMullen abruptly resigned, leaving lead director Ronald Sargent temporarily at the helm. As most investors will attest, things can and do fall through the proverbial cracks during such transitions.
Don't overestimate the potential fallout while underestimating the opportunity linked to this change, though. Kroger's still-growing e-commerce business (including its retail media advertising business) along with its private-label brands are two powerful tools for a new leadership with a fresh perspective to do even more with. A change at the top might be exactly the jolt this grocery chain needs following McMullen's 11-year stint.
Slow and steady wins the race
Kroger isn't a high-growth company that can turn a relatively small investment into a relatively big win overnight. It's a fairly slow mover.
Slow and steady wins the race though, particularly when you're reinvesting dividends.
To this end, although newcomers will be plugging in while Kroger's forward-looking dividend yield stands at a ho-hum 1.8%, 18 consecutive years of annual dividend growth paired with generous stock buybacks have made this ticker a surprisingly rewarding holding. It's outperformed the S&P 500 during this 18-year stretch, in fact, when factoring in reinvested dividends.
The key has simply been remaining patient -- something Buffett and his lieutenants do very well.
More to the point for interested investors, don't look for things to be any different for this stock in the near or distant future, regardless of the ever-changing economic backdrop. That's the big reason Buffett's stuck with it this long when he's had plenty of opportunity to swap it out for other prospects.
Should you invest $1,000 in Kroger right now?
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
