A couple of weeks ago, I said it was prudent to diversify one’s portfolio with the use of stocks in sectors that aren’t powering the economy because it’s always possible to be wrong.
As examples, I cited shares that were near the top of the ratings charts that I might consider for addition to portfolios — like the Weiss Million-Dollar Ratings Portfolio (WRP) — that were positioned pro-cyclically. And then, last week, I wrote about the promise that retail stocks held for those who believe — as I do — that betting on the continuation of consumer spending in the U.S. is likely a good bet.
One stock that I could have included in both articles was CVS Caremark (CVS — rated A+), which I subsequently purchased for the WRP. Its characteristics — defensiveness in that it is a consumer-staples stock, plus the growth inherent in its pharmacy-benefits operations and future expected growth in consumer spending on health-care items — made it kind of a hybrid between the two influences (defensiveness, but also growth) that I liked in both instances.
|CVS’s decision to exit tobacco sales gave it a big jump on its competition.|
The stock prices for CVS’ closest peers — Walgreen (WAG — rated B+) and Rite-Aid (RAD — rated C) — have clearly done better over the past year. But the Weiss Ratings Model picks stocks based not only on their past growth, but also on stability of that growth and the solidity of the balance sheet.
But CVS had an ace up its sleeve in the form of its Caremark operations — a pharmacy-benefits manager, or PBM, which provides a huge leg up compared with its rivals for long-term growth in the basic mission of a drugstore.
CVS’s decision, widely publicized last week, to exit sales of tobacco was a master stroke in its competitive efforts, in my view. I think the others, if they want to compete in the future, must now follow suit. And since those two competitors do not have the PBM business to help offset the loss of revenue, they will be hurt worse than CVS will be. But the decision by CVS means that it is finally leading the vanguard of drugstore stocks in terms of marketing “juice.” It’ll be difficult to unseat that free publicity CVS garnered, and its prospects as a solid investment merely increased by its solid quarterly results (it beat consensus and raised guidance).
We can use the Ratings Model for comparisons like that for many sectors, but keeping with the theme laid out above, let’s take a look at the top three grocery retailers in terms of ratings.
One issue most investors overlook with grocery retailers is that they, like drugstores, have geared their merchandising toward a more discretionary item selection. As such their revenues and earnings profiles are more cyclical than many give them credit for being. And there are varied ratings assigned to very close competitors that can help us choose among them.
For instance, consider the following three stocks:
Kroger (KR — rated A-), Sysco (SYY — rated A-) and Costco (COST — rated A-)
Those three stocks are a traditional grocery retailer, a distributor and a club store. I won’t go into the individual merits for each here. But I will make clear that I would prefer the consideration of these three over the following two, which, though market darlings in the past, have less appeal for the near-term investor.
Those “also-rans” are Whole Foods (WFM) and Weis Markets (WMK), both of which are rated B+. Again, I won’t go into their individual merits — and do consider them worthy of further research — but if I were buying a non-drugstore name today, and had already purchased some CVS (as I have), I would seriously consider the three A- stocks above, and afterward consider the two B+ stocks as potential additions for a portfolio that needs balance, but that still desires growth.