Grocery Stocks: 2 to Buy, 2 To Keep Shelved

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tdp2664 InvestorPlace It's a tough time to be in the grocery business. Grocery stocks traditionally have had an easier time navigating tough economic times than other retailers because — let's face it — people have to eat. But as commodity costs and fuel prices rise, grocery chains are feeling the squeeze — particularly as consumers rail against higher prices. Two types of shoppers are reshaping the grocery market: bargain hunters and affluent or boutique buyers. When unemployment is high, middle-income buyers seek the best deals on food and other necessities. That trend is giving warehouse companies like Costco (NASDAQ: COST ) and Wal-Mart 's (NYSE: WMT ) Sam's Club an edge over traditional grocery chains. Affluent buyers (or those who are attracted to higher-end, niche products) are creating an opportunity for retailers that specialize in pricier specialty or organic items. Because these customers typically are more loyal and less price-sensitive, they are willing to pay more to get what they want. Stores that deliver that value proposition consistently are likely to earn loyalty — and higher profits. Bringing bargain shoppers through the door seldom buys loyalty because they will go wherever they get the most bang for the buck. But Goldman Sachs analysts believe food price inflation will rise by 6% to 8% in the second half of this year alone. And that might make it harder for grocers to differentiate themselves from warehouse giants. The high end of the market — organic and other specialty products — creates a stronger competitive opportunity. Based on those trends, here are two stocks to put in your cart and two to leave on the shelf: Buy Whole Foods (NASDAQ: WFM ). The perennial leader in the organic foods space continues to pack a big punch. At $58.61, the stock is trading 72% above its 52-week low of $34.04 last October. With a market cap of $10.38 billion, WFM has a price/earnings-to-growth ratio of 1.80, which is high enough to suggest it's overvalued. Still, the company has a great debt position: $536.91 million in cash vs. only $18.04 million in total debt. It also pays a dividend yield of 0.7%. Ruddick Corp . (NYSE: RDK ). The parent company of Harris Teeter last week reported that its third-quarter net sales increased by 8.1% to $1.19 billion. Even better, its earnings rose by 11.2% to $32.1 million. Two keys to the company's success: cuts in operating costs and higher profits from premium meats and wines, as well as organic items. At $41.28, RDK is trading more than 33% above its 52-week low of $30.86 last August. With a market cap of $2.03 billion, the company has a PEG ratio of 1.36. Debt position is a bit high — $74.31 million cash compared to total debt of $325.14 million. Still, the stock pays a dividend yield of 1.3%. Leave on the shelf SuperValu (NYSE: SVU ). The company's earnings per share might have beat estimates by a penny, but investors took more note of the company's $43.7 million revenue miss. The company's strongest play is in the super-discount space with its Save-A-Lot stores. But that means it's flying into the competitive teeth of warehouse stores. Since releasing financials on July 26, the stock has slipped nearly 16%. At $7.67, SVU is trading nearly 39% below its 52-week low of $7.06 in January. With a market cap of $1.63 billion, the PEG ratio is only 0.74, which should suggest it's undervalued, but the fundamentals are challenging enough to warrant some skepticism. Debt position is ugly: $172 million in cash compared to total debt of $6.98 billion. With earnings per share of a negative $7.09, even a 4.5% dividend yield doesn't make it a value buy. Safeway (NYSE: SWY ). Fuel sales boosted Safeway's recent second-quarter earnings by 3.2% to $145.8 million; revenue increased 7.1% to $10.2 billion. But if you take fuel sales out of the mix, same-store sales increased by a flat 0.5%. Higher wholesale and commodity prices shaved margins as the chain sought to boost customer loyalty amid rising prices. At $18.92, SWY is trading 25.6% below its 52-week high of $25.43 in May. With a market cap of $6.64 billion, Safeway has a PEG ratio of 1.12, meaning it's valued about right. Debt also is an issue: the company has total cash of $246.6 million compared to total debt of $4.96 billion. It does have a dividend yield of 3%, however. As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.