Time for Bulls to Bet on Underperforming Grocery Store Chain

There could be a silver lining to Kroger stock's pullback

Managing Editor
May 26, 2022 at 1:17 PM
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Struggling Kroger Co (NYSE:KR) stock has seen a steady downtrend exacerbated by a few bear gaps since an April 8 record high of $62.78. The Cincinnati-based grocery giant has struggled in lockstep with the broader market in recent weeks, but has managed to cling above its year-to-date breakeven level. The silver lining? This recent pullback has put the stock near a trendline that could have historically bullish implications for KR, if past is precedent.

The trendline in question is Kroger stock's 160-day moving average. According to a study from Schaeffer's Senior Quantitative Analyst Rocky White, the stock has come within 2% of this trendline five other times in the past three years. The shares saw a positive one-month return after every single one of these signals, and averaged a 9.2% jump during that time period. From Kroger stock’s Thursday close of $48, a similar move would put KR just above $52.

It's also worth noting --like most of the broad market -- that the grocery stock sits firmly in "oversold" territory, indicating that a short-term bounce could be looming. This is per its 14-day Relative Strength index (RSI) of 27.

kr may 26 cotw

Options traders have been quite bearish amid the recent slide. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day put/call volume ratio of 1.80, which sits higher than 96% of readings from the past year. In other words, options traders are picking up puts at a much quicker-than-usual clip, and an unwinding of this bearish sentiment here could send the stock even higher.

Analysts are also looking ripe for a drastic shift. Heading into Friday’s trading, 14 of the 18 covering brokerage firms carry a tepid "hold" or "strong sell" recommendation. Should this pessimism begin to fuel an unwind, we could see a slew of bull notes in the coming weeks and months for KR.

Now looks like the opportune time to get in on this rally with options. Specifically, KR’s Schaeffer's Volatility Scorecard (SVS) sits at 96 out of 100, implying the equity tends to outperform volatility expectations.

Subscribers to Chart of the Week received this commentary on Sunday, May 22.


 

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