Ahead of the Valentine's Day session, all eyes on Wall Street focused on the soon-to-be disclosed Consumer Price Index (CPI) report. With historically high inflation rates determining the Federal Reserve’s monetary policy, the disclosure will be of significant consequence. Because of ongoing macroeconomic vagaries, however, investors may want to go for a relatively safer bet in Kroger (KR). Indeed, options traders appear to be positioning themselves for an uptick in KR stock.
According to Zacks, expectations were mixed prior to the CPI report’s disclosure. Specifically, “headline CPI is expected to rise a half point from -0.1% reported for December to +0.4% last month. Meanwhile, year over year is expected to come down 30 bps on both headline and core.” If the report aligns with expectations, the headline CPI number – also known as the inflation rate – will print 6.2% up, representing a decline for the seventh consecutive month.
Of course, a favorable inflation reading would likely have significant implications for market sentiment, particularly for risk-on assets. With evidence that the pace of rising prices is slowing, the Fed doesn’t need to be as aggressive with its benchmark interest rate hikes. Over time, when policymakers deem appropriate, it could inject some dovishness into the narrative.
However, nothing’s guaranteed in the new normal. If inflation data prints worse than expected, then the Fed has an excuse to continue raising rates. Even more worrisome, even if inflation does show a conspicuous decline, eyeballs will eventually shift to China. With the world’s second-largest economy finally having reopened, this dynamic translates to greater activity, which in turn means greater consumption of resources.
Therefore, irrespective of the CPI report, potentially significant headwinds against consumer sentiment exists. In that case, investors should really think about KR stock. Fundamentally, the underlying grocery store operator occupies a low rung in the trade-down spectrum. In other words, households looking to save money will likely cut dining out in favor of cooking in.
This framework should benefit KR stock and it appears that options traders already recognize the opportunity.
KR Stock Becomes a Logical Target of Unusual Options Volume
Following the close of the Feb. 13 session, KR stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This stat shows the difference between the current volume and the average volume over the past month. Typically, traders leverage this information to determine which stocks may be due for big moves ahead.
Specifically, KR’s volume level reached 21,013 contracts against an open interest reading of 118,336. Call volume hit 15,140 contracts versus put volume of 5,873. Further, the delta between the trailing-month average total volume versus the prior session volume came out to 116.61%. The implied volatility (IV) rank hit 33.82%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.
To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.
The IV low for KR stock was 22.58% on Jan. 25, 2023. More than a half-year earlier on June 13, 2022, KR hit its IV high of 52%. Prospective investors should note that per Barchart.com’s technical analysis gauge, KR ranks as an average 88% sell. In the trailing year, shares dipped nearly 2%, presenting an unexciting though comparatively stable investment (the benchmark S&P 500 lost 6% during the same period).
Turning to the professionals, analyst sentiment demonstrates rising optimism. Three months ago, Wall Street experts pegged KR stock a “hold,” breaking down as five strong buys, nine holds and four strong sells. In the current month, the consensus stands as a “moderate buy,” stemming from six strong buys and nine holds.
Finally, KR’s 60-month beta sits at 0.49, reflecting much lower volatility than the benchmark equities index. Given the circumstances, the implied stability alone should warrant some looks.
Macro Tides Favor Kroger
On the financial front, the narrative for KR stock may be the most compelling. Essentially, the nature of the economy is changing, cynically benefitting a permanently relevant business like Kroger.
Between the company’s fiscal fourth quarter of 2019 through Q3 2020, the average year-over-year revenue growth stood at 6.66%. Between Q4 2020 through Q3 2021, the average sales growth tally slipped to 4.22%. Fundamentally, fears of the COVID-19 pandemic faded. With the business community gradually reopening, consumers shifted their spending from the necessities toward the discretionary sector.
Colloquially, we called this phenomenon retail revenge.
However, with economic headwinds brewing again, shoppers have started to hunker down. Thus, we’re seeing spending pivot back to the necessities from the discretionary space, benefitting Kroger. And it’s not just a theoretical framework – the proof’s in the pudding.
More Food & Beverage News from Barchart
- Wheat Complex Posts Gains on Monday
- Soybeans Pull Out Gains on Monday
- Corn Starts the Week on a Strong Note
- Arabica Finishes Moderately Higher as Heavy Rain in Brazil May Curb Coffee Yields
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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