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This Ridiculously Cheap Warren Buffett Stock Could Make You Richer

Motley Fool - Sun Jul 14, 4:30AM CDT

There are a few qualities that Warren Buffett is known to look for in a stock. It's known because he shares his investing wisdom freely, although he rarely explains his rationale for buying specific stocks.

One of his holding company's (Berkshire Hathaway) less talked-about stocks is supermarket giant Kroger(NYSE: KR). But it's a classic Buffett stock and offers more than investors might realize. Here's how it could make you richer as part of a diversified portfolio of great stocks.

Why does Buffett love Kroger?

Kroger is a recent Buffett pick. It's the largest non-discount supermarket chain in the country, with 2,750 stores under more than 20 banners.

Buffett looks for undervalued stocks. At the time that Buffett bought Kroger in 2019, it was under some pressure, and its stock was losing value. But during the past five years since Buffett bought it, it has outperformed the market.

KR Total Return Level Chart

KR Total Return Level data by YCharts.

Buffett clearly spotted an opportunity here. Right before Buffett purchased it, Kroger stock had sunk to a price-to-earnings ratio of only 5.7, its lowest ever.

Kroger has an incredible brand and targets a resilient shopping demographic. Even more, this demographic isn't being taken by the Walmarts and Costcos of the world. Management developed a turnaround plan, and Buffett bought in.

Buffett's secret sauce

Although Buffett doesn't keep his investing methods a secret, he still thinks about stocks differently from many conventional investors. Something that stands out about Kroger, which isn't a very exciting stock by investing community standards, is its direct participation in an important part of the economy.

What sets it apart from supermarket juggernauts like Walmart and Costco is that it targets a more affluent clientele. The high-income population isn't necessarily going to drive out to get better deals at Costco, or at least they're not counting on it. They like to drive to their local, well-appointed supermarket that's full of fresh food and has a pleasant atmosphere. This is Kroger's bread and butter, and this might be what Buffett sees in its story.

Kroger missed out on the initial e-commerce revolution, and that showed up in its sales. Now that it's invested in a full omnichannel model, sales, especially from e-commerce, have been thriving, and that's despite inflation. However, those investments have hit the bottom line, and pressure from rising costs has, too. But Kroger is highly profitable, and it brings in plenty of cash.

Don't forget the dividend

Kroger pays a dividend that yields 2.2% at the current price, and the dividend has increased about 290% during the past 10 years.

Making up only 0.6% of the Berkshire Hathaway portfolio, Kroger is a safe stock that adds value and passive income to the whole. Buffett has extolled the value of a dividend many times. In the amounts Berkshire Hathaway buys, it gets tons of cash from the dividend to invest in other parts of its business. For an individual, that works out as passive income to use for discretionary purposes or to reinvest and expand your base investment.

A growing and reliable dividend also demonstrates management's commitment to shareholders, which is really an investment in itself.

Expensive produce, cheap stock

So, how cheap is Kroger? It's much cheaper than Walmart and Costco, and its price-to-earnings ratio is well below the S&P 500 average.

KR PE Ratio Chart

KR PE Ratio data by YCharts. PE = price to earnings.

Buffett is still holding this stock, which is likely to be undervalued at the current price. That means you can still buy it as a bargain and expect long-term results.

There's another new chapter to the story that could also lead to better performance and more gains. Kroger is in the process of acquiring competitor Albertson's, the second-largest non-discount supermarket chain in the U.S. It's still jumping over some regulatory hurdles, but if the merger goes through, it could produce strong cost efficiencies between the two companies, higher profits, and better overall results.

By itself, Kroger stock probably won't mint too many millionaires. It's a secure stock, more of a bolster for a portfolio than a growth driver. But it has been beating the market recently, and as an anchor stock in a diversified portfolio, it can help investors become a lot richer.

Should you invest $1,000 in Kroger right now?

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Costco Wholesale, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.