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Should Albertsons Stock be in Your Shopping Cart?

Grocery stores like Albertsons Companies (NYSE:ACI) isn't a group that often comes to mind when investors think about making big gains. But that doesn't mean they don't have a place in a well-diversified portfolio.

This story originally appeared on MarketBeat

Grocery stores like Albertsons Companies (NYSE:ACI) isn't a group that often comes to mind when investors think about making big gains. But that doesn't mean they don't have a place in a well-diversified portfolio. contributor/ via MarketBeat

As we learned last year, owning companies in defensive sectors can really soften the blow when the market takes a nosedive. And since people will always need to buy groceries regardless of the economic environment, it doesn't get more defensive than food related stocks.

Albertsons is one of the most recent grocers to hit the major stock exchanges. Its stock had a nice rally going in 2021 but rode a four-day losing streak ahead of this week's earnings report. With the streak stretched to five after a disappointing outlook, it may be time to go on offense with this defensive name.

What Did Albertsons Report for Q4 2020?

Albertsons has an unusual fiscal calendar as its 2020 fourth quarter ended February 27th of 2021. Identical store sales were up almost 12%. Not surprisingly, this was led by a massive uptick in digital sales to the tune of 282%. The top line growth would've been even stronger had fuel sales not slumped due to fewer cars on the road amid the pandemic. Adjusted earnings per share (EPS) came in at $0.60 which surpassed the analyst consensus by a dime.

The fourth quarter and full year (sales up 17%) results were undeniably strong. In fact, it was a record year for Albertsons and the company banked some market share gains. Unfortunately, what stole the show was management's commentary around fiscal 2021.

It said it expects identical sales to decline 6% to 7.5% in the new fiscal year which would equate to two-year stacked growth of 9.4% to 10.9%. The market glazed over the latter part, however, choosing to focus on the inevitable sales decline ahead. Adjusted EPS is forecast to be $1.95 to $2.05, a substantial pullback from the $3.24 recorded in fiscal 2020.

What do the Technicals Say About Albertsons?

Speaking of pullbacks, Albertsons shares are now 12.5% off their April 20th intraday peak of $20.89 after post-earnings sell-off. The red candle of April 26th has a closing price that rests perfectly on the evolving 50-day moving average where the stock will likely continue to receive support. Albertsons is a bargain that investors should be tossing into their cart as if on an episode of television's 'Supermarket Sweep'.

Given the limited trading history of Albertsons' stock, not many technical trends have emerged. There is, however, one active chart pattern that is presaging a possible run to $24.10 to $25.00 by this summer. The ascending continuation triangle formed on the daily chart on April 16th when Albertsons touched $20 for the second time. If the undervalued grocer can once again rebound from its latest swoon, a price check could send it back into the $20's in short order.

Is Albertsons Stock a Buy?

The grocery store operator's outlook for fiscal 2021 registered as 'bearish' to the market, but a more appropriate assessment would have been 'realistic'. Following a year when extraordinary circumstances prompted extraordinary consumer behavior, why would anyone expect anything other than difficult comparisons ahead in 2021?

Not only should management's forecast come across as realistic, but it should be comforting to hear an honest evaluation of what's forthcoming rather than overhyped comments around unsustainable hyper-growth. Just because Albertsons and the grocery store industry will face slowing growth as economic conditions normalize doesn't mean they are not good investments.

There are some positive underlying currents in the Albertsons business model that suggest it can still deliver respectable grocery store-like growth over the long-haul. In a space that is notorious for ultra-low margins, Albertsons has managed to expand its margins despite an influx of COVID-19 expenses. Cash flow was strong in 2020 which also points to a strengthening operating performance.

In addition, the company has taken market share from competitors that haven't been as successful adapting to the digital transformation afoot in the grocery business. The balance sheet is also getting stronger on account of Albertsons commitment to debt reduction. Its net debt ratio was nearly cut in half to a very mangeable1.5x in fiscal 2020. Moreover, Albertsons has an active stock buyback program and offers a 2.2% forward dividend yield.

For these reasons, Albertsons' cautious 2021 outlook shouldn't scare away investors. In fact, for those with a three-plus year view, it should do the opposite. As long as people continue to eat, Albertsons' portfolio of strong grocery store brands and growing technology platforms will deliver defensive growth for the long-term portfolio.

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