Among companies trading on the New York Stock Exchange and the Nasdaq, grocery stores have the strongest financial strength scores. Two companies, The Kroger Co. (KR, Financial) and Weis Markets Inc. (WMK, Financial), have F-scores and Z-scores near historical highs. This suggests that the grocery stores industry has increased value potential in the short term.
Three financial scores, three different ways to measure financial strength
In the late 1900s, three accounting and economics professors developed investing systems to measure the financial strength of companies: Joseph Piotroski of the University of Chicago, Edward Altman of New York University and Messod Beneish of Indiana University. Each professor offered different financial strength perspectives: Piotroski studied the strength of the company’s business, Altman measured the bankruptcy risk of companies, and Beneish looked for signs of earnings manipulation. Their research resulted in three financial strength scores: the Piotroski F-score, the Altman Z-score and the Beneish M-score.
As discussed in an earlier article, the Altman Z-score measures the distress level of a company. Unlike the Piotroski F-score, which ranks a company’s business strength on a scale from 1-9, the Z-score generates one value based on five ratios, four of them relative to the company’s total assets. Columnist The Science of Hitting further detailed Altman’s financial metric.
Unlike the other two financial strength scores, which measure the business strength of companies, the Beneish M-score determines whether the company manipulated its earnings results. The M-score is based on a rather complicated formula that features eight different indices, including: days sales outstanding, gross margin, asset quality, sales growth, depreciation, leverage and SGA (selling, general and administrative) expenses. The M-score also behaves differently than the F-score and Z-score: while higher F-scores and Z-scores imply strong business strength, higher M-scores suggest that the company more likely manipulated its earnings, which can lead to poor quality of earnings.
Among NYSE and Nasdaq companies, the average F-score is 4.8 and Z-score is 3.38. The median F-score is 5, and the median Z-score is 2.03. On the other hand, the median M-score is -2.62, which is below the -2.22 threshold that separates the manipulators from the non-manipulators.
Over 65% of the industries have an average M-score between -2 and -1, and about 98% of the industries have a median M-score less than -2. This suggests that the majority of NYSE and Nasdaq companies are non-manipulators. However, only 15 industries have an average F-score of 7, and just eight industries have average Z-scores greater than 8.
Grocery stores have strong investment opportunities
To determine the best industries in which to invest, we can introduce a metric summarizing the relative strength of the industry compared to the overall NYSE and Nasdaq stock market. The “investing score,” which ranks the industry on a scale from 1-10, determines how likely the industry will present good investing opportunities based on the financial metrics discussed. For each of the financial strength metrics, we have assigned values based on the following guidelines:
- If an industry’s average Piotroski F-score is higher than its average historical median F-score, the industry scores 2 for “Strong F-score.” Otherwise, it scores 0.
- An industry scores 0 for “Strong Z-score” per se if its average Altman Z-score is less than 3. Among the industries that have an average Z-score of at least 3, only those that have average Z-scores higher than their historical minimum Z-scores get a score of 2 for “Strong Z-score.”
- Finally, the industry scores 1 for “Strong M-score” if the average M-score is less than -2.22.
We repeat this process for the median financial strength scores so the maximum investing score is 10 out of 10. As of September, the grocery stores industry has the maximum investing score of 10, suggesting highest value potential. Using the All-in-One Guru Screener, we identified the grocery stores that have an F-score of at least 7, a Z-score of at least 5 and an M-score of less than -2.22. Weis Markets is one of just two companies that meet the above criteria.
The Pennsylvania-based grocery store currently has a financial strength rank of 10, the highest rank possible. As of Sept. 20, Weis Markets has no debt. Even though the company’s Z-scores have slightly decreased during the past 10 years, the Z-score seldom dropped below 6. Additionally, Weis Markets’ F-scores ranged between 5 and 9.
On the other hand, Kroger has a modest financial strength rank of 6. The company has issued new debt during the past three years, and its interest coverage underperforms 71% of global grocery stores. Despite this, the retail food and drugstore company has had increasing Altman Z-scores in the past 10 years.
As the two companies have strong financial outlooks, some gurus have increased their positions in Kroger and Weis Markets. During the second quarter, Jim Simons (Trades, Portfolio) purchased about 2 million shares of Kroger at an average price of $35.99 per share, and Chuck Royce (Trades, Portfolio) added 0.65% to his Weis Markets position. Royce owns 1,391,600 shares of Weis Markets, the highest number of shares among gurus who own WMK.
See also
The “FZM Strategy” applied to grocery store companies outperformed the Standard & Poor’s 500 index exchange-traded fund during the backtesting period from 2006-2016. Using annual rebalancing, the strategy realized an overall return of 250.66%, as shown in the following table.
| Year | SP 500 ETF | Yearly Rebalance | Semiannual Rebalance | Quarterly Rebalance | No Rebalance |
| 2006 | 13.74% | 17.55% | 9.19% | 18.64% | 17.55% |
| 2007 | 3.24% | 24.94% | 20.60% | 29.46% | 11.36% |
| 2008 | -38.28% | -19.93% | -20.43% | -32.17% | 2.64% |
| 2009 | 23.49% | -24.11% | 12.90% | 13.57% | -1.05% |
| 2010 | 12.84% | 21.91% | 15.16% | 9.20% | 17.65% |
| 2011 | -0.20% | 14.09% | 12.01% | 9.11% | -9.95% |
| 2012 | 13.47% | 17.16% | 18.86% | 13.93% | 9.76% |
| 2013 | 29.69% | 15.70% | 19.69% | 25.62% | 6.09% |
| 2014 | 11.29% | 63.49% | 25.87% | 11.15% | -10.73% |
| 2015 | -0.81% | 31.67% | 11.41% | -9.95% | -5.11% |
| 2016 YTD | 4.80% | -3.18% | -5.62% | 22.55% | 18.57% |
| Overall | 71.59% | 250.66% | 187.28% | 147.48% | 64.75% |
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Disclosure: The author has no position in the stocks mentioned in this article.
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