Kroger Inc

Ticker: KR Buy below $25.

Why I Would Buy

1.       Cheap– Kroger trades at about 13x trailing earnings and 11x forward earnings.

2.      High RoE – Regular readers know that returns-on-equity is my favorite metric for picking stocks; Kroger has maintained double digit annual returns-on-equity during the past decade.

3.      Low Payout Ratio – Kroger pays about 2% dividend, but the payout is only about 20% of earnings.

4.      High Ratings –Both Morningstar and S&P rate the stock at 4 out of 5 stars.

What Could Go Wrong

1.       Highly Leveraged –Kroger has a large degree of indebtedness, more than that of its peers and more than I am comfortable with. Greater than 65% of the company’s capital structure is debt.  

2.      Low Credit Rating –This is related to the point above. Kroger has credit rating that is barely investment grade (Moody’s Baa1).

3.      Industry Risks – Kroger is grocery chain, selling groceries is a cut throat retail business with thin margins.

Disclosure: I am long KR, please read additional disclosures here before taking any action based on this post.

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