A Tasty Play for These Tough Times

 | Nov 16, 2011 | 9:00 AM EST  | Comments
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AHONY

People have to eat, and this holds true even in tough economic times. This works to the benefit of grocery stores -- and that makes these stocks a good addition to an investment portfolio.

It's interesting to note that my guru strategies -- which are modeled after investment approaches of some of history's greatest investors -- have identified several grocers headquartered in Europe that currently make for solid investment prospects. If you want to add groceries to your portfolio basket while also diversifying into shares of overseas-based companies, you'd do well to seriously consider these companies.

Delhaize Group (DEG) is a Belgian-based grocer with major operations on the East Coast of the U.S., along with stores in Belgium and several other countries. Its American stores have such nameplates as Food Lion, Hannaford Bros. and Sweetbay.

One strategy that thinks highly of Delhaize is the one I've based on the writings of Peter Lynch, the great mutual fund manager. This strategy is particularly known for the P/E/G, which is price-to-earnings relative to growth. It's a measure of how much the investor is paying for growth. An acceptable P/E/G is 1.0 or less, and if it is 0.5 or less, that's even better. Delhaize is close to this ideal, sporting a P/E/G of 0.58 based on the average of the three-, four- and five-year historical growth rates. In addition, it operates with an acceptable level of debt.

Tesco is a British retailer, and a very large one at that. (Shares trade on the "pink sheets" under TSCDY, and on the London Stock Exchange under TSCO.) The company's market capitalization is in the neighborhood of $52 billion. Compare that with Kroger (KR), the largest traditional grocery store operator in the U.S., whose market cap, at some $14 billion, barely reaches past Tesco's one-quarter mark.

Tesco is the largest food retailer on its home turf of the U.K., where the company operates about half of its total of 5,400 stores. Tesco's stores can also be found in Eastern Europe, Asia -- and in the U.S., where it began operating in 2007. Tesco now has 164 Fresh & Easy grocery stores in California, Arizona and Nevada.

Two of my guru strategies think Tesco looks appetizing. The Lynch strategy likes the company's P/E/G of 0.89, based on the average of the three-, four- and five-year historical growth rates in earnings per share, as well as the company's acceptable amount of debt.

My James P. O'Shaughnessy-based strategy is also buying. It likes Tesco's very large market cap, hefty cash flow per share of $2.76, large number of shares outstanding (at 2.7 billion) and huge trailing 12-month sales of $101 billion. The final step of this screen is taking companies that pass these four tests, and choosing the top 50 based on their dividend yield. With a yield of 3.58%, Tesco makes it into this elite group.

Koninklijke Ahold (AHONY) is another grocery retailer liked by the Lynch strategy. Headquartered in the Netherlands, it operates a total of nearly 3,000 stores in Europe and the U.S., where its brands include Stop & Shop and Giant. Though not as large as Tesco, its market cap of $15 billion makes it a shade more valuable than Kroger.

The company's P/E/G is 0.72, based on the average of the three- and four-year historical EPS growth rates. Its debt, moreover, is at an acceptable level.

All three of these are large, strong, successful companies that sell essentials. Adding any of them to your holdings would bring you both a strong industry -- and a foreign presence, to boot.

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