2018 year-end portfolio statements should be in your mail/in-boxes by now. If you are looking at your annual performance numbers, wondering what to do about the mid-single to double-digit losses, you aren’t alone! Investors all over the world are asking themselves: Where should we move our money to in 2019, that will assure us a better year.
Well, we just may have some food for thought. Read on to find out more!
According to data from the Bureau of Labor Statistics (BLS), Food inflation seems to be on an uptick. The percent change in Sept 2018 was .0%, and it saw a slight decline in Oct last year (-.1%). Nov, however, saw an increase of 0.2%, with a 12-month percent change of 1.4%. Some forecasters see that upward trend continuing – marching up towards the 1.6% level – over the rest of 2019 and beyond.
Economists and investment analysts assure investors that inflation isn’t a “real concern”, but it does appear that food prices are creeping up – albeit ever so stealthily. So, what’s cooking?
One way to put “non-present” inflation and higher food prices in perspective in to look at the BLSs Producer Price Index (PPI). According to the BLS, this is a metric that: “…measures the average change over time in the selling prices received by domestic producers for their output.”
So, what does that mean? Well, a lose translation could mean that, as you’ve been walking out of your neighborhood grocery of late, your wallets have been getting a bit lighter every month. Simply put, the green highlighted segment of the graph above shows that, in 2018, you paid more, and your grocer made more!
What’s the opportunity?
Why not pay more and make even more? That’s the opportunity here! Let me explain.
Grocery shopping, even when you do it online, is a very personalized experience. Once you are used to a certain quality (or a unique shopping experience), you don’t tend to switch easily. For shoppers that prefer the tactile experience of bricks-and-mortar stores, convince (proximity to home or work, and familiarity with a layout) also discourages switching grocers too frequently.
And your grocer knows that!
Food retailers have pricing power. Even in deep recession, you need to buy food. And more grocers are broadening their offering – from fresh foods and deli offerings, to health foods and shakes. Some, like Walmart, offer the temptation of a one-stop-shop for more than just groceries.
You might cut down on quantities, and you may substitute items on your shopping list. But at the end of the day the choice will be: Substitute an expensive product for something less expensive. You’ll still be paying more for the “less expensive” choice than you would have paid a month ago….and that trend will continue to increase. And that’s where the opportunity arises!
Don’t just buy groceries from your retailer – buy their stocks as well! Instead of just paying your grocery bill, why not also receive something from the food retailer in return – like dividends (for those that pay it!) and share-price appreciation.
Food for thought
So, which names of the dozen or so grocery businesses should you own? Well, that really depends on what you are looking for. Giants like Walmart (WMT) and Amazon (AMZN – with its Whole Foods franchise) are a must have for any 2019 grocery-focused portfolio. Not only do these names have lots of cash to grow and fund new acquisitions, but capital investment in technology means they will be the likely survivors once home-delivery and drone-delivery becomes reality in a few years.
Of course, it doesn’t hurt either that WMT pays a dividend. And AMZN’s 5-year growth profile makes it an obvious “must have” in any consumer cyclical/defensive portfolio.
Smaller players, like KR and SFM are good additions to the portfolio because they offer diversification. Additionally, they also offer some long-term growth potential, with expected 5-year growth rates of 5.51% and 14% respectively. And while SFMs exceptional growth rate comes with no dividend, investors in KR get a modest 2.05% dividend to go with modest growth expectations.
Other names to consider might include:
- Costco Wholesale Corporation (COST)
- Ingles Markets, Incorporated (IMKTA)
- Weis Markets, Inc. (WMK)
However, these names haven’t performed per our expectations over the 200-day range that we are analyzing. That does not mean they should be disregarded as potential portfolio additions down the line. In fact, industry giant COST might be a great compliment to AMZN and WMT – but we have sidelined it for now.
Here’s what our dream portfolio of grocery names would look like:
Most, if not all, of these names are exhibiting upward price momentum – which is a good time to add to any portfolio. And while KR is showing a -3.72% decline over our 200-day analysis, it has risen nicely (nearly 4%) over the past 15-days or so.
Obviously, a portfolio like this one isn’t recommended for short-term trading – although you could make a lot of money if you do that too (but it’s risky and you need to be nimble!). However, if we are looking to build a portfolio that will capitalize on food inflation through 2019 and beyond, you’ll likely do much better than the 6.57% average return already delivered over the past 200-days.
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Author does have investment in Amazon.com stock discussed in this article.