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  1. Home
  2. / Investing
  3. / U.S. Equity

Value in Good Management

Kroger is a good example of execution.
By JIM CRAMER
Mar 05, 2015 | 01:20 PM EST
Stocks quotes in this article: DRI, AVGO, NXPI, CY, ACT, VRX, COST, WFM, WMT, TGT, KR, ABBV, JNJ, ISIS, PCYC

Nobody talks about it enough, nobody talks about the sheer power of execution, of a management team fulfilling unmet needs or changing course for changing times. Yet it is often a huge part of this long-term rally that we are having.

 We know this X factor is underestimated because we see it happen every day. This morning we got a textbook example of what I am talking about. There is a perception that stocks are very expensive. If you read The Wall Street Journal  this morning you might have seen a story entitled "Frostbitten Costco is on Thin Ice." In this "Ahead of the Tape" article we see the bias so many have toward the negative.

"Thursday's results have the potential to disappoint given that the stock is more richly valued than usual," the article says. What's the worry? "Another month  of zero same-store-sales numbers growth or worse may make investors see the tank as half empty rather than half full."

Fortunately, this "Ahead of the Tape" column was actually Behind the Tape because Costco (COST) released its earnings at 3 a.m. and they were spectacular. They had an amazing 8% comparable-sale stores for the quarter and 4% for February, not zero, not negative.

What does this say about our particular market? If you read this article before you saw Costco's results, your mind races and you think, oh my, that's a very expensive stock that has run too much, like so many others.

Then, however, you see the numbers and you have to do a radical re-valuation because Costco's neither Frostbitten nor on Thin Ice. It is undervalued and, yes, underestimated. Why is that? Because I think that the people whom the journalist interviewed for the article and the journalist himself didn't recognize how strong CEO  Craig Jelinek and his team is. Whatever bubble you think that one of the world's largest retailers may be in is directly contradicted by the facts.

Perhaps this $66 billion retailer is worth much more than it is selling for, based on these numbers. Or, take Kroger this morning. I have been pounding this Kroger story since I spent some time with management and recognized how competitive they are. And how they are leveraging their scale to wrench the profits from the food companies that sell into them.

I like their strategy of consolidating an once-fragmented industry. I like the "krogerization" they do once the acquisition is completed where they use their buying power to bring down costs. They are the smartest at integrating sales on all levels. They hired RR Donnelly to integrate an omni-channel approach to grocery stores, going from fliers to your home to in-store promotions.

They have the highest penetration of high-margin store brand merchandise and the largest selection of natural and organic products. Their comparable-store sales have no peer and rival the growth numbers Whole Foods (WFM) has put up, actually exceeding them last year when they had 4% gains.

They just did a 6% number this morning. That's amazing for the nation's second-largest retailer. They are taking share from everyone -- Wal-mart (WMT), Target (TGT) and other supermarkets -- even Whole Foods.

It's such a juggernaut I had to go see it for myself, taking a trip to a Fred Meyer, a Kroger division, during a recent trip to Klamath Falls, Oregon. What did I find? You know how segregated many supermarkets are between the regular pantry goods and the ghetto of natural and organic. Not at Kroger; the merchandise was integrated right in the aisles with the regular goods and the prices are so competitive you can't believe it.

Many people out West have revolted against all the expensive packaging that so many foods come in. Kroger had aisle after aisle of containers of fresh seeds and nuts and other goodies that you lift up a latch and the stuff comes flowing out right into a baggie you can grab right at the stand.

Their produce was more natural and organic than the other way around. The displays were beautiful. When I checked out, I listened to all the checkers talk to the customers about what they could do better at the stores. They knew many of the customer's names. I have been going to the same supermarket for years and no one knows me.

That's called execution and it is the reason why Kroger is undervalued, even after it made a monster move from $50 to $73 in the last few months. Bubble? No, value.

Then take Pharmacyclics (PCYC). Six years ago this company had a market cap of $36 million. Today, it got a $21 billion bid from AbbVie (ABBV) a major pharmaceutical company, even though it was up more than 88% for the year already. There were not one, but two, other bidders, including its 50-50 partner for a major anti-blood cancer franchise.

Without a bid, this company seems hopelessly overvalued. But it has a drug that could be a blockbuster. Johnson & Johnson (JNJ) was said to have won the bidding for the company, but at the last minute Abbvie came in with a preemptive blast of stock and cash.

Why so much? Because Abbvie has another drug, Humira, that is about to go off patent in the next couple of years. Without a replacement, Abbvie will see its earnings cut to shreds. Abbvie has an unmet need for earnings. The drug Pharmacyclics has, Imbruvica, could do $5 to $6 billion in sales  by the time Humira goes off patent -- of which half  goes to JNJ.

The drug might have other uses, too, which would make it more valuable. My point, though, is that Pharmacyclics seems like it is in a bubble until a company that's very smart makes a bid for it, putting the whole issue of valuation into question. It also makes you think that Isis (ISIS), and Recptos and Biomarin (BMRM) are all cheap and could get bids simply because of the power of this Pharmacyclics deal.

Oh, and let's not forget that Valeant (VRX) and Actavis (ACT), two incredibly-acquisitive companies, have seen their stocks go up pretty non-stop ever since they acquired Salix and Allergan, respectively. This occurred even as we heard in both cases that the companies overpaid.Considering where the acquiring stocks are now, can't we just stipulate they didn't pay too much even as Actavis did buy Allergan for more than twice what many on Wall Street thought was too high a price.

Or how about NXP Semiconductor (NXPI), or Avago (AVGO), or Cypres Semiconductor (CY)? These are all companies that were battling competitors and then merged with them in multiple moments of an "if you can't beat them join them" philosophy. Why not? If a company can create a one-stop shop for many chips that go into cars are homes then it is indeed worth more than a standalone. Bubble? No, just a combined company that has more earnings power than two single companies alone.

Finally. let's take Darden (DRI), the parent of Olive Garden. For ages this had been a poorly-run restaurant chain that also included Red Lobster. Results were awful and disappointing quarter after quarter. Then, not that long ago, an activist took a stake, the board acted, replaced management and it has been off to the races ever since.

A company that had been run poorly at $44 is now run well at $64. Bubble? No. Undervaluation.
Some bears could argue that I cherry-picked, that I selected a couple of stocks to buttress my non-bubble thesis. You could contend that all of this goes away if the Fed raises rates.

But I would counter that, no, these are very well-run companies that are underestimated by pundits who simply refuse to consider that this is a market of stocks. And many of the stocks of companies are managed by people who are capable of going well outside what's expected of them to render their stocks cheap -- even as they looked, on paper, until certain events, very expensive.

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Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long TGT and ABBV.

TAGS: Investing | U.S. Equity

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