Kroger Stock Signal Has Never Been Wrong

Short interest remains at record high levels

Jun 24, 2020 at 11:06 AM
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On Thursday morning, Cincinnati-based grocery chain stepped into the earnings confessional for its fiscal first-quarter report. Kroger Co (NYSE:KR) reported adjusted earnings of $1.22 per share alongside revenue of $42 billion, toppling consensus estimates of $1.09 earnings per share and $40.45 billion, respectively. And while the company announced on a conference call that it sees current-quarter sales tapering off from their March and April highs, that call later revealed Kroger still expects to exceed its fiscal-year shared outlook that it issued on April 1.

Overall, it seemed like an encouraging report, especially considering the impact COVID-19 has had on fellow grocery outlets Costco (COST) and Walmart (WMT), both of which are struggling with their year-to-date breakeven levels and suffered negative post-earnings reactions. Yet KR joined its sector peers with a post-earnings pullback of its own, closing down 3% on Thursday. In the end, the company's lack of a revised outlook, plus a combination of broad-market headwinds stemming from another dismal jobless claims report and bubbling panic over a second wave of coronavirus, was too much for the stock.

If past is precedent though, this negative post-earnings reaction could become a longer-term aberration. Thursday's drop put KR's year-to-date gain just below its +10% year-to-date level, which, prior to this week, had admirably held up as support since late April amid the last two months of choppy, sideways trading. What's more, this area coincides with the shares' 80-day moving average, putting the security within one standard deviation of the trendline after a lengthy stretch above it, defined for this study as having traded above it 60% of the time in the past two months, and in eight of the last 10 sessions. According to Schaeffer's Senior Quantitative Analyst Rocky White, this signal has sounded five other times in the past three years, and the equity was up 5.8% on average one month later, with all five of the returns positive.

From KR's current perch at $31.12, a move higher and of similar magnitude would put the stock just below the $33 level, and erase its 4.8% June deficit. There are additional factors working in Kroger stock's favor; in the wake of Thursday's pullback, KR's 14-day Relative Strength Index (RSI) slipped from 52 at the close on Wednesday all the way down to 40. The last time Kroger's RSI smoothed out at the 40 area was March 25, a bottom that preceded short-term strength from the shares.

While short interest remains at record-high levels, it has sputtered recently, only up 1.7% in the two most recent reporting periods. Yet the 54.52 million shares sold short still accounts for a healthy 7% of KR's total available float. At the stock's average pace of trading, it would take more than four days for shorts to buy back their bearish bets; an ample amount of buying power that could unwind and fuel a rally.

Stepping away from technicals, Kroger recently attracted some good press with an announcement that it was partnering with robotics maker Ocado to build their first automated warehouse in Monroe, Ohio. The two companies share an exclusive partnership, allowing Kroger to utilize advanced warehouse technology and robotics in the same manner as e-commerce giants (AMZN) and Walmart. This is not to say Kroger's ability to keep up with its rivals in innovation directly correlates to the stock's performance, but it does underscore Kroger's status as a hegemon in the grocery sector; a company that will not be broad-sided by sudden sector headwinds or global catalysts.

As always though, the uncertainty wrought from coronavirus remains a wildcard. Kroger and its fellow grocery peers gutted out the historic spring sell-off thanks to strong sales from e-commerce and customer stockpiling. A second-wave of COVID-19 could lead to this mindset replaying itself over in the summer, but then again, a return to as much normalcy as possible could prove to be a boon for everyone.

COTW KR June 19

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, June 21.


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