In this article, we will be looking at the 11 best grocery stocks to buy. If you want to skip our analysis of the grocery shopping segment and the first six stocks in this group, go directly to the 5 Best Grocery Stocks to Buy.
Grocery stocks are considered one of the best options during uncertain macroeconomic situations due to the defensive nature of their businesses. In July 2022, grocery stores in the U.S. reported sales of $70.81 billion, according to the U.S. Census Bureau. This represented an increase of 9.2% year-over-year (YoY). The steep YoY increase can be attributed to rising inflation, which has caused an increase in consumer spending. Inflation for July 2022 clocked in at 8.5% YoY, around its highest level in nearly four decades. The Federal Reserve has been trying to combat inflation by increasing the benchmark interest rates. Since March 17, there have been four interest rate hikes, with the current Federal Funds rate in the range of 2.25% to 2.5%. Experts expect the benchmark interest rate to reach 3% by the end of 2022 and 4% by the end of 2023 as the Federal Reserve is focused on bringing inflation back down to its target of 2%.
According to Grandview Research, the size of the U.S. grocery retail sector stands at around $1 trillion as of 2022, and that’s expected to grow by an average rate of 3% for the next eight years. The COVID-19 pandemic saw a major shift in grocery sales from brick-and-mortar stores to online channels. The pandemic served as a wake-up call for the industry, which had not evolved for several decades. Before the pandemic, only 3% of grocery sales came from online channels, which has now increased to 8%, according to Elaine Russel at Albertsons Fund. Grocery’s online channel share is expected to reach a point between 10% to 20% of total sales by 2025. Research from The Consumer Trends Tracker showed that 45% of buyers who purchase groceries online use multiple channels for shopping. Customers who purchase groceries online typically spend $594 each month, compared to $388 for customers who shop in-store.
E-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) also ventured into the grocery retail segment with its acquisition of Whole Foods Market for $13.7 billion nearly five years ago. Amazon.com, Inc. (NASDAQ:AMZN) has opened 60 new Whole Foods Stores across the U.S. since the acquisition and has installed modern checkout technology as well to streamline operations. Furthermore, notable grocery stocks such as Target Corporation (NYSE:TGT), Walmart Inc. (NYSE:WMT), and The Kroger Co. (NYSE:KR) are also attracting hedge fund investment.
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Our Methodology
To compile our list of the 11 best grocery stocks to buy, we have looked into the fundamentals of these companies along with their growth outlooks. The overall market sentiment has also been gauged using analyst ratings. The stocks have been ranked in terms of the number of hedge fund shareholders as of Q2 2022, based on Insider Monkey’s database of over 890 elite funds that filed 13Fs for the Q2 reporting period.
11 Best Grocery Stocks to Buy
11. Casey’s General Stores, Inc. (NASDAQ:CASY)
Number of Hedge Fund Holders: 23
Casey’s General Stores, Inc. (NASDAQ:CASY) is an Ankeny, Iowa-based chain of convenience stores situated across the Midwestern and Southern U.S. in 16 states.
In a research note issued to investors on August 18, Ben Bienvenu at Stephens increased the target price for Casey’s General Stores, Inc. (NASDAQ:CASY) from $230 to $250 and maintained an ‘Overweight’ rating on the stock. The analyst anticipates a significant decline in operating expenses and the continuing trend of strong in-store sales to remain consistent during the current quarter and the rest of 2022.
Experts believe that Casey’s General Stores, Inc. (NASDAQ:CASY) has an attractive risk/reward profile and can grow its EBITDA at a high single digits rate, which is a significant achievement in a defensive industry.
Casey’s General Stores, Inc. (NASDAQ:CASY) was discussed in the Q1 2022 investor letter of Upslope Capital Management. Here’s what the firm said:
“Casey’s General Stores (NASDAQ:CASY): 3rd largest independent convenience store operator in the U.S. and 5th largest pizza chain; unique footprint exclusively focused on the Midwest/South. Growing business with highly defensible model offers good value and significant optionality from organic initiatives and M&A.”
10. Sprouts Farmers Market, Inc. (NASDAQ:SFM)
Number of Hedge Fund Holders: 24
Sprouts Farmers Market, Inc. (NASDAQ:SFM) is an Arizona-based operator of a supermarket chain that provides a wide variety of gluten-free, natural, and organic foods.
Despite offering products in a niche segment, Sprouts Farmers Market, Inc. (NASDAQ:SFM) has been able to hold its ground during the pandemic amongst giants like Albertsons Companies, Inc. (NYSE:ACI), Kroger Co. (NYSE:KR) and Walmart Inc. (NYSE:WMT) due to its differentiation strategy.
Sprouts Farmers Market, Inc. (NASDAQ:SFM) shares are currently trading at a P/E multiple of 12x as opposed to an average P/E ratio of 15x in the past. There has been a widespread belief that scale is critical in the grocery segment, which benefits large-scale grocery businesses. However, Sprouts Farmers Market, Inc.’s (NASDAQ:SFM) unique offerings allow the company to be less concerned about price competition in relation to its industry peers. Sprouts Farmers Market, Inc. (NASDAQ:SFM) has observed net income growth of 16% in the last five years, significantly higher than the industry average of 7.8%.
In its Q2 2022 investor letter, Arch Capital Management shared its stance on Sprouts Farmers Market, Inc. (NASDAQ:SFM). Here’s what the firm said:
“We entered 2022 with Sprouts Farmers Market (NASDAQ:SFM) as the fund’s largest position. This was due to our initial position sizing, the stock’s great performance, and the poor performance of the rest of our portfolio holdings. In early March, SFM popped 15% and reached a market cap close to $4 billion. This put a double whammy on our expected forward returns for the stock. First, and most obvious, a higher market cap means we are yielding less in cash flow each year. Our bet on SFM revolved around durable (but low growth) cash flow generation that was yielding more than 10% when we purchased shares. At a market cap significantly higher, forward returns would be lower than our 15% hurdle rate. Second, a big reason we liked SFM was management’s strategy to pour all free cash flow into share repurchases at a depressed earnings multiple. This attractiveness incrementally goes away at higher and higher share prices. Combine this with other opportunities presenting themselves with the broad market sell-off this year, and we decided to fully exit our SFM position.”
Of the 895 hedge funds in Insider Monkey’s database that filed 13Fs, Sprouts Farmers Market, Inc. (NASDAQ:SFM) was held by 24 hedge funds at the end of Q2 2022.
9. DoorDash, Inc. (NYSE:DASH)
Number of Hedge Fund Holders: 31
DoorDash, Inc. (NYSE:DASH) is a San Francisco, California-based online food ordering and food delivery platform. A dynamic shift is taking place in grocery companies towards the e-commerce side, and DoorDash, Inc. (NYSE:DASH) is establishing itself as a leading player in the segment.
On August 23, Deepak Mathivanan at Wolfe Research reiterated his price target of $110 on DoorDash, Inc. (NYSE:DASH), along with an ‘Outperform’ rating. The target reflects potential upside of over 78% from the closing price as of August 29. The analyst highlighted that the Street is underappreciating the bottom-line performance of the core U.S. restaurant business.
Experts believe that the fundamentals of DoorDash, Inc. (NYSE:DASH) are solid and offer significant bottom line growth potential in the future. DoorDash, Inc. (NYSE:DASH) is pursuing long-term growth initiatives through investments and should continue to sustain strong revenue growth in FY23 and beyond.
Overall, 31 funds held a stake in DoorDash, Inc. (NYSE:DASH) as of Q2 2022.
8. Albertsons Companies, Inc. (NYSE:ACI)
Number of Hedge Fund Holders: 37
Albertsons Companies, Inc. (NYSE:ACI) is a Boise, Idaho-based supermarket chain. It is the second biggest operator of supermarket chains in North America behind Kroger Co. (NYSE:KR).
Experts believe that Albertsons Companies, Inc. (NYSE:ACI) stock has been underappreciated against its competitors since its IPO in 2020. To overcome this challenge, the company hired The Goldman Sachs Group, Inc. (NYSE:GS) and Credit Suisse Group AG (NYSE:CS) for a strategic review of the business in February 2022. It must be noted that Albertsons Companies, Inc. (NYSE:ACI) is mostly owned by institutional investors with a lockup period of two years that was set to expire in June 2022. However, the institutional holders have decided to maintain their stake until September as they expect positive results from the strategic review.
Over the previous two years, Albertsons Companies, Inc. (NYSE:ACI) has recorded $2 billion and $2.3 billion in free cash flow, respectively. Albertsons Companies, Inc. (NYSE:ACI) recently beat its competitor Kroger with respect to sales growth despite weaker multiples. The company’s trailing twelve month (TTM) net profit margin was 2.3% compared to 1.5% for Kroger, while its TTM EBITDA margin was 6.1% compared to 5.1% for Kroger as of Q1 2022.
7. Dollar Tree, Inc. (NASDAQ:DLTR)
Number of Hedge Fund Holders: 38
Dollar Tree, Inc. (NASDAQ:DLTR) is a Chesapeake, Virginia-based discount retailer that operates multi-price-point chains across the U.S.
On August 26, Scot Ciccarelli at Truist gave Dollar Tree, Inc. (NASDAQ:DLTR) stock a target price of $168 with a ‘Buy’ rating. The analyst highlighted that the Q2 2022 results of the company were “fine” compared to his estimates. The company slashed its FY22 guidance due to investments at Family Dollar, which is also owned by Dollar Tree, Inc. (NASDAQ:DLTR). This was an unanticipated interruption in the bottom-line transformation story of the company. However, Ciccarelli saw the recent sell-off in Dollar Tree, Inc. (NASDAQ:DLTR) stock as a reflection of nearsightedness by investors. Analysts anticipate a significant acceleration in the company’s earnings by mid-2023 and believe now is the time to accumulate Dollar Tree, Inc. (NASDAQ:DLTR) stock.
Here’s what Heartland Advisors said about Dollar Tree, Inc. (NASDAQ:DLTR) in its Q4 2021 investor letter:
“Buck up. The resiliency of the consumer has been a driving force over the past 18 months as the economy rebounded from early COVID-19 lows. While inflation may be a challenge to spending habits in the new year, the portfolio benefited from holdings that we believe are less economically sensitive and should continue to perform as government stimulus payments fade. Dollar Tree Inc. (DLTR) provides an example of our approach.
Dollar Tree owns two brands, Dollar Tree and Family Dollar, each operating roughly 8,000 locations in the United States and Canada. The Dollar Tree brand has historically operated a true dollar store with its locations offering products at the fixed $1 price point.
The Family Dollar unit was acquired in 2015 and sells mostly daily essentials to lower-income customers. The retailer was an underperforming asset when Dollar Tree acquired the business. Over the past six years, management has invested significantly in remodeling Family Dollar stores and improving merchandise to raise profit margins closer to those of industry peers.
Shares of Dollar Tree were up to close out 2021 as investors applauded management’s move to raise the price point of goods sold at Dollar Tree to $1.25, which is expected to offset inflation pressures for the company and help it maintain margins on the goods it sells. Additionally, as headwinds have begun to emerge for consumers, the company’s mix of products, in our view, should produce more resilient sales among its cost-conscious customers.
As shares have appreciated, we’ve trimmed the portfolio’s stake in the business to manage exposure. However, we continue to maintain a position on the belief that shares are still priced at a discount to their historical average based on our 2022 earnings estimates.”
6. Pinduoduo Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders: 41
Pinduoduo Inc. (NASDAQ:PDD) is a Shanghai, China-based e-commerce company involved in connecting farmers and consumers directly through its marketplace model.
Only 19% of the grocery purchases in China were made through an e-commerce channel in 2019. That is expected to rise to 30% by 2025 and result in e-commerce grocery retail sales of $380 billion. The COVID-19 pandemic is believed to have played a role in the growth acceleration and these developments are expected to favor Pinduoduo Inc. (NASDAQ:PDD).
Ronald Keung at Goldman Sachs gave Pinduoduo Inc. (NASDAQ:PDD) stock a target price of $95 with a ‘Buy’ rating in a research note issued on July 11. The analyst notes that Pinduoduo Inc. (NASDAQ:PDD) is achieving rising penetration amongst Chinese users, as active buyers surpassed 869 million in the last year compared to 882 million for Alibaba Group Holding Limited (NYSE:BABA).
Pinduoduo Inc. (NASDAQ:PDD) was mentioned in the Q4 2021 investor letter of Tao Value. Here’s what the firm said:
“On the detracting side, one of our largest detractors includes Pinduoduo (ticker: PDD). Pinduoduo (PDD) reported the second consecutive GAAP profit quarter yet missed on the revenue due to nation-wide consumption weakness & scaled back Sales & Marketing efforts. Market disliked it and the stock price plunged on the earnings. In my opinion, the accounting profits proved the original thesis of using S&M to acquire users and using great shopping experience to keep them. After realizing the first growth curve, Pinduoduo now shifted its focus & investment to agriculture. It is still very early, but the reduced size due to price drop warrants a position to watch and continue grow with such a team with strong culture.”
In addition to Pinduoduo Inc. (NASDAQ:PDD), stocks such as Target Corporation (NYSE:TGT), Walmart Inc. (NYSE:WMT), and The Kroger Co. (NYSE:KR) are also on our list of the 11 best grocery stocks to buy. See where they rank by clicking the link below.
Click to continue reading and see 5 Best Grocery Stocks to Buy.
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Disclose. None. 11 Best Grocery Stocks to Buy is originally published on Insider Monkey.
