The Kroger Co. (NYSE: KR) plunged 10%.
SuperValu Inc. (NYSE: SVU) tanked 13%.
Costco Wholesale Corp. (Nasdaq: COST), Sprouts Farmers Market Inc. (Nasdaq: SFM) and Wal-Mart Stores Inc. (NYSE: WMT) each fell about 5%.
No, this wasn’t on an earnings announcement.
It was in response to a breaking news item that sent shock waves through those stocks.
It created an instant bloodbath. One that I took advantage of in my Pure Income service to add instant income.
But I think the opportunity from this bloodbath is bigger than just one recommendation, and that the declines in these stocks are an opportunity you shouldn’t pass up.
In June, Amazon.com Inc. (Nasdaq: AMZN), the online retail giant, announced it was going to purchase Whole Foods Market, which started the bloodbath you see above.
Then last Monday, Amazon announced it was going to close the deal and offer discounts on “popular” items.
These stocks sold off again.
I put popular in quotes because they’re items that are popular at Whole Foods, not necessarily with the public. Items like avocados, almond butter and baby kale, to name a few.
Still, investors view Amazon’s disruptive business model of lowering prices and not caring about profits as a negative for Whole Foods’ competitors.
There’s just one problem.
Amazon picked the worst target to do that with.
Whole Foods, nicknamed “Whole Paycheck” by many, is known for its overpriced organic foods.
Reuters reported that Gordon Haskett Research Advisors analyst Charles Grom did a pricing analysis of Whole Foods before and after the deal was announced. He found that prices overall declined just 1.2% from the week before despite the “slashed prices” that made headlines. And several items actually increased in price.
Other shopping studies have shown that Trader Joe’s prices are roughly 20% cheaper than Whole Foods. And prices from Wal-Mart and Aldi are often cheaper as well.
And that’s what I mean by Amazon picking the worst target.
Whole Foods, even after substantial price cuts of as much as 48% on over a dozen items, still doesn’t impact Amazon’s ability to be competitive in the grocery industry.
Amazon has a lot more work to do before it can disrupt this industry.
That’s why today there is an opportunity with practically all of Whole Foods’ competitors since they all sold off on the news. But one that will remain in good shape is Costco.
Personally, I don’t shop at Whole Foods because of its prices and limited selection of items.
I have tried it, but I opted for a local Walmart, Publix or Costco, where I recently grabbed a membership. At these places I do my organic, cage-free and gluten-free shopping along with anything else I may need.
And the Amazon acquisition hasn’t made me want to switch my shopping habits at all.
That’s why these stocks are a bargain today.
Amazon is years, probably even a decade, away from disrupting the industry. And any disruption will still have traditional winners like Costco as well.
It may surprise you, but in 2016 Costco was the world’s largest seller of organic foods. Not Whole Foods, which specializes in organic foods.
Costco has used the warehouse model to perfection since the mid-1980s and is now the largest American membership-only warehouse club. The company pays a modest 1.3% dividend yield.
According to Capital IQ, a trusted source for stock market information, the company has an average rating of “outperform” by 26 analysts, with an average price target of $180 — signaling about 15% upside over the next few months. You can expect even greater gains to follow as investors realize that Amazon isn’t going to be as much of a game changer in the industry.
And a little sidenote: Its in-store quick-serve restaurant has food items that haven’t increased prices since the mid-80s — a hot dog and a drink for $1.50, and a fully cooked whole rotisserie chicken for less than $5.
Amazon may be the most interesting company to have entered the grocery sector, but I’ll stick to the companies like Costco that have decades of keeping prices low and offering customers exactly what they want.
Chad Shoop, CMT
Editor, Automatic Profits Alert