While Wall Street Worries, This Cheap Warren Buffett Consumer Stock Is a Screaming Buy

Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) has owned Kroger (NYSE: KR) shares for nearly seven years. That goes back to the days when Warren Buffett made the capital allocation decisions. Buffett may have stepped aside as Berkshire Hathaway's CEO, but the famed value investor undoubtedly approves of this holding from his perch as chairman.

The company results haven't been terrible, but the new CEO aims to accelerate growth. Kroger's shares haven't performed well, but a check of the business shows this is an excellent buying opportunity for astute long-term investors.

Image source: Getty Images.

Growing sales

Kroger operates supermarkets that include grocery, pharmacy, and gas stations. People need these consumer staples, no matter what's going on with their personal economic situation. That's the good news.

However, it's a very competitive business. Giants like Amazon and Walmart compete in the space. Still, Kroger has been in existence since 1883, so it's been doing something right.

Fortunately, new CEO Greg Foran doesn't plan to sit idly by. Foran plans broad-based price cuts to remain competitive. He certainly knows how to run an operation focused on low prices, having previously worked as CEO of Walmart U.S.

Kroger may not be growing fast, but it has seen increasing sales. The company's first-quarter same-store sales (comps), excluding gasoline, grew 1%. On that basis, management expects comps to increase 1% to 2% for the year.

Still, the company's gross margin under generally accepted accounting principles (GAAP) contracted 30 basis points to 22.7%. Investors may be concerned that lower prices will further hurt margins, but management plans to minimize the impact by pressing suppliers on costs and focusing on efficiency.

Cheap valuation

With intense competition, tepid sales growth, and a lower gross margin, investors haven't been too pleased with Kroger. Over the last year, through July 6, the share price lost 16.1%. Meanwhile, the S&P 500 index gained 19.3%.

That's certainly disappointing, but a new CEO with fresh ideas and tremendous success at Walmart should provide investors with optimism about the future. Cutting prices to maintain competitiveness seems like a good first step.

In the meantime, Kroger's valuation has become more attractive. Earnings can fluctuate, so it's easier to use the price-to-sales (P/S) ratio. The shares' P/S ratio has dropped from 0.35 to 0.25 over the last year. That's a fraction of the S&P 500's P/S multiple of 3.7.

Kroger shares may deserve a lower multiple than the overall market, given that it's not a fast-growing business. But a steady business in the hands of a strong and experienced executive focused on market share and improved sales should reward patient investors.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.