The 11 Best Values in Food and Staples Retailing

Study after study has shown that stocks with low price-to-earnings multiples significantly outperform high P/E stocks. Research from my favorite investing guru, NYU professor Aswath Damodaran, pegged the outperformance at anywhere from 9% to 12% per year, depending on the study period. That's big money we're talking about.

But you already know that you can't just go out and buy the stocks with the lowest multiples. Companies can trade at dirt cheap prices for a number of dire reasons, including low growth prospects, skepticism about earnings, or high risk of bankruptcy.

These dangerous stocks can quickly crater. Buy too many of them, and you'll increase your own risk of bankruptcy!

Thus, for a company to be truly undervalued, Damodaran says in his book Investment Fables: "You need to get a mismatch: a low price-to-earnings ratio without the stigma of high risk or poor growth."

Of course, you're unlikely to find any high-growth, low-P/E companies out there. But Damodaran suggests setting a reasonable minimum threshold for earnings growth, such as 5%. There are also various ways to minimize risk, including staying away from volatile stocks or companies with dangerous balance sheets.

The screen's the thing
We're looking for companies with low price-to-earnings multiples, but also a relatively low amount of risk, and the potential for reasonable growth. Our screen today will cover the best value plays in the food and staples retailing industry, as defined by my nifty Capital IQ screening software.

There are 21 such companies with market caps topping $500 million on major U.S. exchanges. They have an average forward P/E of 16.6. Here are my parameters:

  1. To stay away from bankruptcy risk, I used Damodaran's suggestion and only considered companies with total debt less than 60% of capital.
  2. In hopes of capturing a reasonable amount of growth, I looked at Capital IQ's long-term estimates, and kept only companies expected to grow EPS at 5% annually or better over the next five years. Furthermore, I required at least 5% annualized growth over the past five years.

Only 11 companies passed the screen:

Company

Market Cap
(in millions)

Forward 
P/E

Debt to Capital

Estimated EPS
Growth

Delhaize Group

$7,714

10.1

35%

6%

Wal-Mart (NYSE: WMT  )

$183,421

11.6

45%

11%

Kroger

$14,405

12.1

60%

9%

CVS Caremark (NYSE: CVS  )

$50,617

13.0

21%

11%

Sysco (NYSE: SYY  )

$18,030

15.0

39%

9%

Ruddick

$2,021

15.8

25%

12%

Walgreen (NYSE: WAG  )

$40,894

16.0

14%

15%

Companhia Brasileira de Distribuicao (NYSE: CBD  )

$10,511

20.9

50%

39%

Costco (Nasdaq: COST  )

$34,863

21.8

15%

13%

United Natural Foods

$1,994

22.1

21%

15%

Whole Foods Market (Nasdaq: WFM  )

$9,786

27.5

7%

17%

Source: Capital IQ, a division of Standard & Poor's.

There's quite an interestin g jump in the P/E multiple with the last four companies in the table. They may be worth the premium price, but if you're interested in nabbing low P/E bargains it's better to concentrate your research in the top half of the table.

To further stack the odds on your side, Damodaran says you can eliminate any companies that have restated earnings, or had more than two large restructuring charges over the past five years. And if volatile swings in price cause you to lose sleep, consider only companies with betas less than one.

For more on this industry, you may be interested in our research report The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail. Click here to claim your free copy.

Fool analyst Rex Moore often staples his food and runs a real-money Rising Star portfolio based on his screens. You can find him on Twitter. Rex owns no companies mentioned here. The Motley Fool owns shares of Costco Wholesale and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Sysco, Wal-Mart Stores, and Costco Wholesale. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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