Grocery Store Stocks: Whole Foods, Safeway, Kroger (WFMI, SWY, KR) in a sector that as a given runs on razor thin profits margins is a crazy idea, what's just as scary as buying airline stocks?  How about grocery store stocks.  In grocery store land, there's Whole Foods Market, Inc. (NASDAQ:WFMI) and then there's everyone else, the old dogs like Safeway Inc. (NYSE:SWY) and The Kroger Co. (NYSE:KR).

However thanks to the recession, grocery stores are still the only retailer we can count on taxpayers spending their money at. The proof came this month when Whole Foods Market (NWFMI) reported fiscal Q3 income available to common shareholders of $65.7 million, which was a 88% increase from the $35 million the company reported in Q3 2009.

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Whole Foods Market Inc (WFMI) shares have traded between $24.94 and $43.18 over the past 12 months.  Whole Foods shares are now trading with a P/E Ratio of 27.5 and EPS of 1.3.  WFMI shares closed the day Friday at $35.70 and its rebounded 30.14% from its 52-week low.

This month Whole Foods said they expect the fourth quarter EPS in a range of $0.27 - $0.29. Analysts are currently projecting WFMI to report Q4 EPS of $0.28.  For full year 2010, the company sees earnings per share in a range between $1.37 - $1.39 per share. Analysts currently are projecting FY10 EPS of $1.37.  

Unlike its peers (Safeway or Kroger), Whole Foods has had two upgrades this month:

10-Aug-10 Upgrade UBS Neutral → Buy  
09-Aug-10 Upgrade Canaccord Genuity Hold → Buy


Then we get to the old dogs, and if you ask Cort Gwon from FBN Securities he recommends going long Safeway Inc. (NYSE:SWY) and short The Kroger Co. (NYSE:KR) according to this weekend's Barron's article.

( Safeway Inc (SWY) shares have traded between $18.75 and $27.04 over the past 12 months. Safeway shares are now trading with a P/E Ratio of 0 and EPS of -3.13 and its shares are just 3.6% from its 52-week low. Safeway shares closed the day at $19.45 on Friday, down -0.71% or 14 cents.

Over the past 12 months Kroger Co (KR) shares have traded between $19.08 and its 52-week high of $24.80. Kroger Co shares are now trading with a P/E Ratio of 1047.9 and EPS of 0.02 and its shares have moved up 6.15% from its 52-week low. KR shares closed Friday trading at $20.33, down -0.15% or 3 cents.

swyFrom Barron's -- "When stock picking is difficult, it's a great environment for pair trades," says Cort Gwon, director of trading strategies and Research at FBN Securities. By putting an equal amount of dollars in the stocks of two companies in the same industry, one stock purchased and the other sold short, the investor is less exposed to the mood swings and macro worries that drive the broad market.

Gwon screens for unusual divergences between market leaders whose stocks have been highly correlated historically. When one underperforms the other significantly enough for about three months, he recommends buying the underperformer and selling short the outperformer. "Something has broken down in the relationship between the two stocks and you don't know what it is, but you are betting it's not a significant factor and that the spread between them will return to normal," he says.

If both stocks go up or down by the same percentage, the return is zero. But if, as expected, the long position rises more than the short, or the shorted stock falls more than the purchased one, a positive return is generated. Gwon refreshes his portfolio of about 21 pair trades regularly. The average monthly total return of each pair is 1.4%, but he recommends investing in a portfolio of trades rather than single pairs.

Lately he has recommended buying grocer Safeway (ticker: SWY) and shorting Kroger (KR). Though the two stocks usually are more than 90% correlated, Safeway is down about 11% since late May and Kroger is up 3%.

wfmiThus fellow Masters, if you are considering any grocery store stocks, stick to Whole Foods (WFMI) or Safeway (SWY), we tend to prefer Whole Food as they have proven in 2010 they can still rake in the cash, not to mention its stock is up 30% YTD.  

Disclaimer: No positions in any of the securities mentioned in this publication.