By Sam Stovall Food retailers' stocks have been ringing up gains recently. Year to date through Sept. 16, the S&P 1500 Food Retail index, which consists of eight large-, mid- and small-cap companies, gained 18.9%, while the overall market rose 2.8%.
The subindex has also exhibited an improvement in its rolling 12-month relative-strength ranking in the past four weeks.
"RELIEF TO INVESTORS." The rolling 12-month relative strength price chart (pictured below) demonstrates the subindex's recent outperformance. The jagged blue line represents the subindex's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 designate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindustry index's 14-year mean relative strength.
The recent strength in this group must come as a relief to investors after a long dry spell. During 2004, this subindustry index underperformed the broader market, rising 1.7%, while the S&P 1500 advanced 10. It also underperformed in 2003 and 2002.
After the group's lengthy stint as a market laggard, I wondered if its current leadership meant the start of a longer-term turnaround or just a short-term technical recovery. So I reviewed this group's investment outlook with S&P equity analyst Joseph Agnese. He says S&P's fundamental outlook for the S&P Food Retail index is positive.
WINNING BY BEING DIFFERENT. Why the bullish stance? Agnese thinks the recent outperformance partly reflects optimism regarding food retailers shifting operational strategies, which S&P believes are becoming increasingly focused on differentiation through product and service offerings rather than low prices.
Further, S&P believes current valuations of food-retailing stocks do not appropriately reflect the benefits that it anticipates from these differentiation strategies. The upshot: Agnese sees the S&P Food Retail index outperforming the S&P 1500.
Agnese says S&P believes improving sales trends will continue to reflect food retailers' progress in differentiating store offerings from low-price competitors. As more chains focus on increasing the number of store remodelings, rather than on new openings, competitive pressures should also ease somewhat, in S&P's view.
INTENSE COMPETITION. S&P looks for margins to stabilize, reflecting continued cost-cutting efforts and savings from newly renegotiated labor union contracts. Agnese says these contracts will eventually result in reduced wage and health-care expense, in S&P's view.
Additionally, Agnese thinks that consolidation could ease competitive pricing pressures, as well as improve operating profitability over the intermediate term, by further leveraging overhead expenses over a greater number of stores. However, in S&P's view, risks remain high as differentiation strategies are rolled out and margin pressures may result as pricing competition remains intense in some markets.
Longer term, S&P thinks consolidation is likely as it sees not only the supermarket group likely to remain highly competitive but also the growing penetration of discounters such as Wal-Mart (WMT) supercenters continuing to siphon off food dollars typically spent at the supermarket.
RUSHED CONSUMERS. Agnese believes Albertson's (ABS) recent announcement that it was exploring the possible sale of the company has focused attention not only on differentiation strategies but also on underlying real estate values.
The supermarket subindustry is also facing pressure from restaurants, in S&P's view. Agnese points out that as consumers have grown increasingly rushed, with less time to prepare meals at home, they have been spending more food dollars away from traditional supermarkets.
S&P believes that, to be competitive in the future, supermarkets will have to continually develop new ways to make their stores more attractive, convenient outlets for food.
So, there you have it. In S&P's view, the subindustry's momentum and fundamental outlooks are positive, indicating the potential for further price advances in the months ahead. Among S&P's top picks in the group: Albertson's, Kroger (KR), and Safeway (SWY), each of which is ranked 4 STARS (buy).
Source: Standard & Poor's
Industry Momentum List Update
For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of Sept. 16, 2005.
Diversified Metals & Mining
Fertilizers & Agricultural Chemicals
Managed Health Care
Oil & Gas Drilling
Oil & Gas Equipment & Services
Oil & Gas Exploration & Production
Oil & Gas Refining & Marketing
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
In the U.S.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
For All Regions:
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Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Stovall is chief investment strategist for Standard & Poor's