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James Li
James Li
Articles (895)  | Author's Website |

3 Defensive Retail Companies to Consider as US Producer Prices Decline

Stocks are trading below Peter Lynch value and have good business predictability

October 08, 2019 | About:

In light of falling U.S. producer prices, three defensive retail companies with good growth potential according to the All-in-One Screener’s Peter Lynch Growth Screen are Big Lots Inc. (NYSE:BIG), The Kroger Co. (NYSE:KR) and Walgreens Boots Alliance Inc. (NASDAQ:WBA).

Dow tumbles as trade worries hurt U.S. producer price indexes

On Tuesday, the Dow Jones Industrial Average closed at 26,164.04, down 313.98 points from Monday’s close of 26,478.02 on the heels of U.S. producer prices declining the most in eight months.

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The U.S. Department of Labor reported the final demand producer price index declined 0.3% during September, driven by lower costs in goods and services. The decline came against the backdrop of slowing economic growth amid trade tensions between the U.S. and China and other geopolitical concerns.

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Although the Dow pared losses on Federal Reserve Chairman Jerome Powell’s comments that the central bank will soon begin expanding its balance sheet in response to recent funding issues from the bond markets, losses accelerated on the heels of additional geopolitical issues involving the U.S. and China.

Peter Lynch Growth Screen identifies opportunities within defensive retail

Headed by retail giants like Walmart Inc. (NYSE:WMT), Costco Corp. (NASDAQ:COST) and Target Corp. (NYSE:TGT), the defensive retail sector includes companies that engage in the sale of essential products like groceries and pharmaceutical products. Unlike the apparel and special retail sector, which has high cyclicality, the defensive retail sector is not as sensitive to changes in the business cycle because even during market downturns, consumers still need to purchase groceries and pharmaceutical products.

The Peter Lynch Growth Screen seeks companies that have good business predictability, solid revenue growth over the past 10 years and a price-earnings ratio less than 14. As Lynch set his earnings line based on a price-earnings ratio of 15, stocks with a price-earnings ratio less than 14 are considered undervalued.

Big Lots

Columbus-based Big Lots provides a broad range of merchandise, including food, consumables and home products. GuruFocus ranks Big Lots’ profitability 8 out of 10 on several positive investing signs, which include a five-star business predictability rank and expanding profit margins despite margins outperforming just 53% of global competitors.

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Gurus with large holdings in Big Lots include Bestinfond (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.

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Kroger

Cincinnati-based Kroger operates supermarkets, convenience stores and jewelry stores. GuruFocus ranks the company’s profitability 8 out of 10 on several positive investing signs, which include a five-star business predictability rank and a return on equity that outperforms 84.42% of global competitors.

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Gurus with large holdings in Kroger include Simons’ Renaissance Technologies and Ray Dalio (Trades, Portfolio)’s Bridgewater Associates.

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Walgreens

Deerfield, Illinois-based Walgreens operates over 8,000 drugstores throughout the U.S. GuruFocus ranks the company’s profitability 8 out of 10 based on several positive investing signs, which include a strong Piotroski F-score of 7, a three-star business predictability rank and a return on equity that outperforms 83% of global competitors.

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Gurus with large holdings in Walgreens include Tom Gayner (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

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Disclosure: No positions.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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