By now, you probably know that Amazon.com (AMZN) just bought Whole Foods Market (WFM) for a whopping $13.7 billion. What you may not know is how the deal impacted shares of other grocers and food-related retailers. Many of them plummeted on the news. But has the usual Wall Street overreaction made these retailers value stocks overnight?
Here’s how a few big-name retail stocks reacted to the Amazon-Whole Foods deal in the two trading days that followed it:
Six Struggling Retail Stocks
Costco (COST): -8%
Dollar General (DG): -7.3%
Kroger (KR): -26%
Sprouts Farmers Market (SFM): -15%
Target (TGT): -9%
Wal-Mart (WMT): -5.8%
On average, those six retailers shed nearly 12% of their value in two days—all due to circumstances outside their control. It shows you the power Amazon wields on Wall Street, and the fear Jeff Bezos’ company strikes into the retailers he wages war against (just ask the manager at your local bookstore or department store … if you can still find one).
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That said, Wall Street is notorious for its overreaction. Investors tend to over-reward on good news and over-punish on bad news. But after a few days of taking a more sober view of the companies involved, the pendulum usually swings back in the other direction. Thus, when good companies get pummeled on bad news, it can create a strong value investing opportunity, at least temporarily.
So, does that mean the six nose-diving retail stocks listed above are now value stocks? You need to look at them on a case-by-case basis, of course. TGT looks the cheapest on a price-to-earnings basis, which is now a mere 10.6 (down from 14 as recently as February). Kroger also sports a modest P/E, at 13.5. None of the others trades for less than 16 times earnings, even after last week’s massive selloff.
And while TGT stock may look attractively valued, its sales are no longer growing. Target’s revenues have declined for six straight quarters.
Kroger’s sales are growing, but its profits aren’t—earnings per share were down 54% last quarter.
Wal-Mart’s sales growth is modest (0.8% last year), profits are declining (-3.9% last year) and the stock trades at 17 times earnings.
Sprouts Farmers Market has the best top-line (+13.8% in the first quarter) and bottom-line (+9.7%) growth of the group, but the stock is a little pricey at 25 times earnings.
Costco is coming off a great quarter, but the stock is the most expensive of the six (P/E of 28) and has been up and down for quite some time (+2.3% in 2017).
Dollar General may be the closest combination of growth and value stock, trading at less than 16 times earnings with 12% EPS growth last year. But the chart looks rough—it’s down 4.7% this year after last week’s decline, and has tumbled more than 21% in the last 12 months.
Deal Didn’t Create Value Stocks
Truth be told, I wouldn’t buy any of these retail stocks—regardless of whether you’re a value investor or a growth investor. Retail is a difficult sector at the moment, and food retailers were particularly taking it on the chin even prior to the Amazon-Whole Foods union. That mega-deal should make life even more difficult for the likes of Target, Wal-Mart and Costco.
So, in searching for value stocks, I’d look elsewhere. And if you want help finding the best values, I’d subscribe to our Cabot Benjamin Graham Value Investor advisory, which has routinely beaten both the market and Mr. Warren Buffett himself for more than two decades.
And if you want growth? Well, AMZN (+33% this year) is a great place to start.
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