Recession Resistant Grocery Outlet Holding Corp Quietly Sets New High

Don’t Count On A Pullback For Grocery Outlet Holding Corp 

If you are waiting for a pullback in Grocery Outlet Holding Corp (NASDAQ: GO) you may be in for a disappointment. While the stock is trading at a very high valuation for today’s times it is among the most perfectly positioned growth stocks we can think of. Not only is the company a retailer of consumer staple products but it is also a discount retailer of the same with better branding than the dollar stores. In this light, the company is supported by consumer trends that have spending dollars focusing on staple items and staple items at a discount. The takeaway is that share prices have been steadily creeping higher while the S&P 500 flounders and are now tickling a new 18-month high. 

Analysts Drive Go Grocery Holding Higher 

The analysts are a little mixed in regards to the valuation for Grocery Outlet Holding Corp but they are driving it higher. The 8 analysts covering the stock with ratings less than 1year old have it pegged at a Moderate Buy and that is edging higher in the 3 and 1-month comparisons. The price target, however, is trailing the price action by 12% although it too is up in the 3 and 1-month comparisons. 

The latest commentary comes from DA Davidson which downgraded the stock to Neutral, citing the valuation, and then upping their price target to $46. The $46 target is up $7 from the previous and 12% above the consensus but assumes the stock is fairly valued at this level. In our view, the company is set up to outperform its consensus and could easily see the price targets get increased again following the next earnings report. 

"In fact, we are increasing our estimates for 2Q22 and the year as we believe GO is well positioned within the current economic backdrop, including benefiting from consumers’ increased focus on value and grocery stores’ ability to pass through at least some inflation,” says analyst Michael Baker. 

The analysts' consensus estimates for FQ2 and the year were raised in the wake of the last earnings report but only to a level in-line with the company’s guidance. In our view, this is underestimating clear momentum in the underlying business that is being compounded by expansion. The comps came in well above consensus at 5% in the last quarter due to increased traffic and market share gains. 

Institutional Support Helps Push Go Grocery Holdings To New High

The institutional activity hasn’t been all that vigorous over the past year but it netted about 4.75% of the market cap based on a $43.35 share price. This has the institutional ownership up to 96.5% which is noteworthy due to the high short interest. Short interest was sitting near 9.2% at the start of the quarter which is fuel for a rally once the new high is set. The shorts may even try to reposition at a new, higher level and help sustain the rally over the next few months. 

Turning to the chart, the stock appears to be consolidating after trending strongly higher. This setup is supported by the indicators on the weekly chart and could easily lead to additional upside regardless of the valuation. Assuming the market moves up to a new high, we see short-covering and new money driving the price up to $47.35 if not higher.