The grocery business is challenging, and the publicly traded companies in the industry tend to trade at modest multiples. Excluding powerhouses like Walmart (WMT) and Costco (COST) , one of the nation’s largest by market capitalization is Kroger Company (KR) . Kroger, trading at 12.7x forward earnings estimates, sells for roughly half that of the S & P 500 yet enjoys one of the richest multiples in the industry. The industry mean is just 11.3x. There’s a reason the multiples are low. Revenues at the largest grocery chains have barely budged in the past five years and, net of inflation, are actually lower. Plus, net income margins are always razor thin in the industry. Kroger’s margin is expected to reach 2.1% in the fiscal year ended January 31, 2026. Albertson’s (ACI) fiscal year ends February 28, 2026, and its margins are expected to be even narrower, at just 1.4%. For most industries, flat to declining revenues — at least on an inflation-adjusted basis — and narrow margins are often signs that they are in secular decline. One imagines that buggy whip and men’s top-hat makers probably saw progressively lower revenues and profits as the end approached. Preferences change The horse and carriage were displaced by the automobile, and John F. Kennedy was the last president to wear a top hat at an inauguration. But, food has thus far remained unthreatened by newer technologies as the source of human sustenance. Eating also doesn’t go out of style, although preferences for what we eat and where we buy it do change. Sprouts Farmers Market (SFM) has been growing faster than traditional grocers and with somewhat wider margins because the chain, a descendant/amalgam of open-air, farmers-market grocery stores, has focused on natural and organic foods. Revenue growth is forecast at ~10% for fiscal year 2026 and net income margins at 5.7%. The company is expected to generate ~$486 million in free cash flow, yielding ~5.6% At just 11.9x forward earnings estimates, Sprouts is trading at a meaningful discount to its historical multiples and is closer to the multiples of traditional/legacy grocers, which grow much more slowly and have much lower margins. Unexciting in the way some growth companies are, Sprouts Farmers Market may be a sensible “get paid to wait” investment either via a buy-write or a cash-covered put. Mechanically, a cash-secured put means you sell a put option and set aside enough cash to buy 100 shares at the strike if assigned — so the obligation is therefore fully funded, or “secured”. No home runs Cash-secured puts work best on businesses where you’re not trying to hit a home run in a week — you’re trying to monetize uncertainty while targeting an entry price you’d be happy with. Options premiums are largely a function of implied volatility (IV) — the market’s priced expectation for future movement. One practical approach is to sell puts when IV is elevated relative to its historical range, using metrics such as IV percentile/rank to avoid selling “cheap” insurance. Given the stock’s recent weak performance and upcoming earnings, implied volatility isn’t cheap; in fact, it’s fairly elevated. Selling a March 65 put just over 6% below today’s closing price would collect roughly 5% of the share price in about six weeks. This is not a momentum trade; it is a contrarian, value-based judgment that the stock has fallen far enough to become interesting, or at the very least is interesting around $61.50, which would be the effective purchase price in the event one is assigned, net of the premium collected. If the stock stays above $65 by March expiration, one earns 5%. If it falls, one will end up owning SFM at a discount of more than 11% to Wednesday’s closing price. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
Using options to play this faster growing, undervalued grocery stock
view original post