We recently compiled a list of the 10 Best Grocery Stocks To Invest In Now. In this article, we are going to take a look at where Dollar Tree, Inc. (NASDAQ:DLTR) stands against the other grocery stocks.
Food prices, along with energy prices, tend to be historically volatile, which is why they are excluded from the core Consumer Price Index (CPI) reading published by the U.S. Bureau of Labor Statistics each month. Thus, when the CPI rose by a seasonally adjusted 0.2% in September, resulting in an annual inflation rate of 2.4%, it didn’t provide much insight into grocery price trends specifically. Annual food inflation climbed to 2.3% in September, up from 2.1% the previous month, marking the largest rise since August 2022. This increase follows a shift in wholesale food prices, which stopped declining early in the year and began to rise again, according to the Food and Agriculture Organization’s (FAO) Food Price Index.
While analysts and supermarket executives point to supply chain disruptions and rising labor costs as the main causes of food inflation, many point out that they often overlook accusations that corporate greed has led to unprecedented revenue levels that unjustifiably exceed profit margins. However, others disagree with this sentiment. One such person is Arun Sundaram, an analyst at CFRA, who states that growth in the grocery sector is driven by strong consumer demand rather than corporate greed:
“While food prices have risen by about 30% since 2019, costs have also increased substantially during this period. Therefore, the key metric to focus on is gross margins, which have remained stable relative to pre-pandemic levels. Moreover, the producer price index has tracked closely with the consumer price index, indicating that the price hikes on the shelves are cost-justified price increases.”
See also: 7 Best Delivery Stocks To Invest In Now.
Given the surge in prices for essential food items and the record-high revenues for retailers, it’s no surprise that stocks in this sector are not only performing well but, in some cases, outperforming the overall market. Additionally, although grocery stocks aren’t immune to recessions, they have shown notable resilience, largely due to consumers’ consistent need to shop for essentials, making grocery stores a frequent destination even during tough economic times.
Grand View Research reports that the global food and grocery retail market was valued at $11.93 trillion in 2023 and is projected to grow at a 3.2% compound annual growth rate (CAGR) from 2024 to 2030. Packaged foods lead the grocery market by product type, holding the largest market share due to their convenience and broad selection. In that same vein, while traditional in-person shopping remains the consumer preference, the online grocery sector is rapidly expanding. Valued at $50.28 billion in 2022, the sector is expected to reach $57.81 billion by 2030, growing at a CAGR of 26.8%.
In any case, people buy groceries consistently, regardless of economic conditions, and their purchasing levels remain fairly stable in both prosperous and challenging times. This makes the grocery industry, a segment of the broader consumer staples (also known as consumer defensive) sector, relatively resistant to disruption. These ‘defensive’ stocks compensate for modest growth with low price volatility, steady profits, reliable dividends, and a strong defensive position. That said, Morgan Stanley equity strategist Michael J. Wilson believes such stocks have rallied recently, making them pricier relative to their earnings. While defensive stocks often perform well following Federal Reserve rate cuts—which could be favorable after the aggressive half-point rate reduction in September—Wilson states that they also tend to lag initially:
“Historically, defensives see fairly persistent outperformance 3-12 months following the Fed’s first cut, but can see initial, modest underperformance in the 1 month following the initial rate reduction.
Recently, investors have shown heightened interest in defensive sectors, particularly within consumer staples, outpacing other areas like real estate and financials. Commenting on this trend, Bank of America strategists noted in a September report:
“The US consumer is reacting to the softer labor market, exhausted pandemic savings, and high interest rates. Signs of this reaction are visible across many angles, including the degree of outperformance in staples versus discretionary stocks.”
Morgan Stanley’s Chief U.S. Equity Strategist, Mike Wilson, also remarked:
“Lately, the market has skewed much more defensively as it has worried more about growth and less about high inflation or rates. Since the spring, the relative performance of defensives over cyclicals has been the strongest since the last recession ended.”
Our Methodology
For this list, we reviewed reports and financial media compilations and identified companies in the grocery industry. From this selection, we chose 10 companies that were the most popular among elite hedge funds, as of Q2 2024. The stocks are sorted in ascending order based on the number of hedge funds with stakes in each.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small-cap and large-cap stocks every quarter and has delivered a 275% return since May 2014, beating its benchmark by 150 percentage points (see more details here).
A shopper browsing through a discount retailers merchandise aisle filled with a wide variety of items.
Dollar Tree, Inc. (NASDAQ:DLTR)
Number of Hedge Fund Holders: 38
Dollar Tree, Inc. (NASDAQ:DLTR) is a U.S.-based retail chain known for offering a wide range of products at various price points. The company’s offerings include consumables like food, health, and household items, as well as seasonal goods. With 24 distribution centers, Dollar Tree primarily serves budget-conscious shoppers.
Loop Capital recently maintained its Hold rating for Dollar Tree, Inc. (NASDAQ:DLTR), keeping a price target of $65. After conducting a pricing study of Dollar Tree Plus items—priced above $1.25—the firm found that Dollar Tree, Inc. (NASDAQ:DLTR) products are, on average, 16.7% cheaper than those at competing retailers, with the total basket price being 19.4% lower. Although the pricing gap has narrowed since June, the comparison wasn’t perfectly aligned due to changes in competing retailers, but Dollar Tree Plus remains competitively priced, a bright spot for the company amid challenging fundamentals.
To address rising competition, Dollar Tree, Inc. (NASDAQ:DLTR) reassessed its strategy, leading to the closure of around 970 underperforming Family Dollar stores by the end of 2023. However, Family Dollar saw an uptick in discretionary spending during Q2, and payroll savings are expected soon. For Q3, the company projects net sales between $7.4 billion and $7.6 billion, with adjusted earnings per share (EPS) between $1.05 and $1.15.
Overall DLTR ranks 6th on our list of the best grocery stocks to invest in now. While we acknowledge the potential of DLTR as an investment, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DLTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
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