Finding the Green in Grocers

 | Feb 21, 2013 | 5:00 PM EST
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Last year I wrote about investing in companies that supply the basic needs of food and shelter as a follow-up to another column where I discussed how economies operate much like Abraham Maslow's hierarchy of needs in the sense that consumers allocate cash flow to basic needs first. Consequently, investing in these areas is a safer and more defensive strategy than investing in other areas, though it may not be as glamorous. And since it's been more than six months since I last reviewed defensive investment strategies, I thought I'd revisit the subject.

Regarding food retailers, I initially focused on Wal-Mart (WMT), Kroger (KR) and Safeway (SWY). While it's been a rocky few years for Safeway, Kroger and Wal-Mart have been relatively steady. But the interesting story here is Safeway. I originally advised buying it as a defensive play in October 2011 when it was about $17. Since then it's gone to $23, then back to $15, and now back to nearly $23, closing 14% higher today. Even as SWY slid to $15 from $22 in the first half of 2012, I advised owning it -- but I couldn't explain the decline in price. Despite concerns about the consumer base being siphoned away by discounters and high-end chains, as I discussed in July 2012, the fundamental story was still strong.

Safeway pays a solid dividend of 3.4%, as do KR and WMT at 2.2% and 2.3%, respectively. Yet I still can't figure out why the price of SWY stock fell so hard in the first half of 2012. It's not just a talking point, though. We've owned SWY for our clients looking for income throughout this economic roller coaster ride. The dividend was strong and we believe it continues to be safe.

As the stock price slid, I was asked why it was happening. My response all along has been that I don't know. Sometimes these things happen for reasons that have little or nothing to do with the common metrics, logic and rationale investors have been trained to look for. It's an uncomfortable position to be in to watch a stock slide and not be able to explain why while keeping your cool in the process. I don't know what will happen to the price from here, but the dividend is safe for income investors.

Wal-Mart has moved to $70 from around $60 in the past year and Kroger has gone to $28 from $24. It is possible that investors finally figured out that the fundamental story for the grocery-store industry and the price of the stocks in that space was better reflected by the performance of KR and WMT than SWY. For whatever reason, the price of SWY stock didn't track the other two. These things happen all the time, even in very basic and easy-to-understand industries and companies.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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