"Buy and hold" or "don't buy a stock if you don't want to own it for the next 10 years" are commonly mentioned as worthwhile maxims to live by to succeed as an investor. While those maxims hold, translating them to "buy and forget about it" commonly becomes a recipe for disaster. The performance of supermarket stocks aptly illustrates this point.
With food purchases being a necessity of life, supermarkets have long been hailed as relatively "safe," non-cyclical investments. While foods are indeed a necessity of life, there is no need to purchase them from a particular supermarket. Competition in this industry is brutal and supermarket shares have been far from safe.
Take the case of Winn-Dixie Stores
Other supermarkets such as Kroger
The lesson? While "buy and hold" or "don't buy a stock if you don't want to own it for the next 10 years" are good maxims, don't lose sight of the company's ability to strengthen or at least preserve the moat around its business.
The obvious question for value investors: Do the years of decline in supermarket share prices present an opportunity or is it just a value trap?
The answer depends on the company and how strong the moat is. In a business where scale matters and discounts from suppliers are tied to volume, Wal-Mart, with close to $260 billion in annual revenues, is a 900-pound gorilla for any supermarket chain to take on. The largest supermarket chain by comparison, Kroger, has only about $50 billion in annual revenues, and the next two largest players, Safeway and Albertson's, have annual revenues of about $35 billion each. However, some factors can still enable select supermarkets to fare better than others, including unique product offerings, protected geography, and size.
Given the wellness trend in the U. S., any retailer who caters to this need has a leg up on the competition. Austin, Texas-based Whole Foods Markets is the nation's largest natural foods supermarket chain, offering a broad selection of organically grown products. The nation's second-largest natural foods supermarket, Wild Oats Markets
In industries like food retailing, geography can provide significant competitive advantages. Take the case of the densely populated Northeast. With relatively few pockets of large vacant land, it is difficult for Wal-Mart to penetrate this area. This region has also been in the limelight of takeover activity. Albertson's recently agreed to purchase Shaw's, a leading New England grocer, for close to $2.5 billion.
Among the big three supermarket chains, Albertson's offers some attraction to the value investor at a forward P/E of less than 14. The Boise, Idaho-based supermarket is only one among the big three to sport a dividend. At the current quote, the dividend yield is about 3.3%, which is right about the level that Fool dividend guru Mathew Emmert looks for in Motley Fool Income Investor. Albertson's has also shown some penchant for acquisitions by acquiring American Stores in 1999 and Shaw's more recently. The Shaw acquisition adds 200 stores to make Albertson's a 2,500-store chain. If the company can continue to acquire and successfully integrate publicly and privately held regional chains, this David perhaps can take on the Wal-Mart Goliath. As of March 3, 2004, about 2.5% of the Legg Mason Value Trust's
Shares of supermarket chains traditionally have correlated well with employment and inflation, both of which seem to be on the rise. Against this macroeconomic backdrop, shares of select supermarket chains such as Wild Oats Markets, Supervalu, and Albertson's may be hunting ground for the value investor. Pathmark has some appeal from the land-locked location of its stores as well as a buyout possibility.
Make no mistake, shares of supermarket companies aren't "safe." But they very well may present opportunities for the value-seeking investor. Just remember not to practice amnesiac investing if you choose one of these companies. You can't "buy and forget about it." The Wal-Mart juggernaut and stiff competition will always be a threat, so keep your eyes wide open.
Guest Fool contributor Sam Subramanian is managing principal of AlphaProfit Investments, LLC, an investment research firm based in Houston, Texas, that publishes the AlphaProfit Sector Investors' Newsletter. Sam owns shares in the Legg Mason Value Trust and looks forward to your feedback via e-mail. The Motley Fool has a disclosure policy.