Analysis: Food Sector Weakness In Response To Amazon–Whole Foods Deal Is 'Overblown'

Amazon.com, Inc. AMZN's $13.7 billion acquisition of Whole Foods Market, Inc. WFM is certainly a game-changer in the food space, but does it justify a large sell-off in many grocery chains and food retailers?

Shares of Kroger Co KR were lower by more than 12 percent late Friday morning while shares of Target Corporation TGT were lower by nearly 10 percent; Costco Wholesale Corporation COST and Wal-Mart Stores Inc WMT were each lower by around 6 percent.

Wells Fargo: Warning Shot To The Food Group

If anything, Amazon's acquisition of Whole Foods would serve as a "warning shot" to the food retail industry which is already struggling from a difficult backdrop, Wells Fargo's Zachary Fadem commented in a research report. As such, the analyst turned "incrementally more cautious" on the brick-and-mortar supermarket industry.

Looking forward the grocery industry is expected to shift toward a combination of digital and local with scale becoming an increasingly important competitive advantage. Yet at the same the considerable decline in many food names appears to be "overblown," the analyst added.

Investors should consider buying shares of food distribution companies who remain more insulated, Fadem suggested. Some of the names include US Foods Holding Corp USFD, SYSCO Corporation SYY, and Performance Food Group Co PFGC.

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