Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.
Lost in the Supermarket
With food prices starting to rise, one might think that being in the supermarket business would be a good thing. Not so, it turns out. Commodity prices are going up faster than the supermarkets can pass the prices along to consumers. The result is a bunch of relatively disappointing earnings reports.
It is not just the traditional grocery stores that are weak, but other stores in the general area, as well. Drug stores these days also sell a fair amount of groceries in the front of the store, and they are also weak according to the Zacks Rank, as are the Convenience Stores.
In any case, in an economic recovery, these "Steady Eddie"-type retailers are not the place to find the biggest improvement in sales or profits. It may also be the case that many of the people losing even their extended unemployment benefits and unable to find work have stopped buying their groceries and are relying on food pantries. Clearly that is not the case for most people, but there could be enough of them to make a difference at the margin.
The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts.
It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. It is even more interesting when you have three large industries, all from the same area, that are clustered together near the top or the bottom. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the "industry."
The supermarket industry is somewhat larger than average in terms of number of firms. Not all of them are U.S.-based, or even have substantial operations in the U.S. Food prices are rising around the world, and in most of the world account for a much bigger share of consumer spending than here in the U.S.
The Drug and Convenience Store industries are smaller with 6 and 4 participants, respectively. The smaller the number of firms in an industry, the more likely it will show up at either the top or the bottom of the Zacks industry list.
The Drug Store industry is in 238th place out of the 256 Zacks industries, a deterioration of 18 spots since last week. The average Zacks Rank rose (a bad thing) to 3.50 from 3.33. The Supermarket Industry was only slightly better, in 234th place, an improvement of one spot, but the average rank was unchanged at 3.44. Convenience Stores were in 211th place, a deterioration of two spots with an unchanged average Zacks rank of 3.25.
The first table Supermarket, Drug and Convenience Store stocks that hold the dreaded Zacks #5 Rank (Strong Sell). The second table shows the Zacks #4 Rank (Sell) firms. Note that most of the names are on the #4 list, not the #5 list. That suggests to me that you simply avoid these stocks, rather than aggressively shorting them.
There is a wide range of market capitalizations to chose from on the list. Note that some of the firms sell much more than just groceries, most notably the biggest one of all, Wal-Mart (NYSE: WMT). Valuations are for the most part reasonable, especially if you are willing to look out to next year's earnings.
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