Cramer’s grocery list: Buy Amazon and Costco. Sell Kroger

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Buy Amazon and Costco, sell Kroger

Amazon has plans to make another big splash in the grocery industry and Costco may be the only company prepared to defend its market share, CNBC's Jim Cramer said Monday.

The "Mad Money" host recommended that investors can buy shares of both Amazon and Costco, but they should sell their stake in Kroger. Although Amazon is already bagging groceries with Whole Foods, Cramer called the new supermarket venture "icing on the cake."

"Now I did some digging over the weekend and … I now feel pretty confident to say Amazon will be making a major, major push into the supermarket space probably sooner rather than later," he said. "My sources suggest that Amazon's expansion here may be much more significant than what we initially thought after reading that [Wall Street] Journal article."

Competition in a crowded supermarket segment has begun eating into the Kroger franchise, Cramer said. The chain's stock price plunged double digits last Thursday after it came up short on earnings and revenue in its fiscal fourth quarter. Revenue was down 9.5 percent compared to the same quarter a year prior and 2019 earnings guidance was as much as 4.8 percent lower than what Wall Street expected.

Shares of Kroger are down nearly 11 percent this year and up about 1.8 percent year over year.

"Kroger's become a punching bag, and while the stock might seem cheap here about 11 times earnings, it's a value trap," Cramer said. "It's only cheap if you believe the company can actually hit those forecasts. I think that's a mighty big if."

To make matters worse, Kroger could be investing $3 billion into its business this year that will cut into earnings, the host said.

"Nobody on Wall Street wants to hear that you're about to have a so-called investment year. An investment year is the kiss of death for your stock price," he said. "[Kroger has] nothing that really sets it apart from the rest of the industry right now, which is why the company now needs to spend a fortune to fend off its rivals."

Costco, on the other hand, is telling a different story. In its latest quarterly earnings, the wholesale grocer reported that same-store sales grew 6.7 percent, compared to Wall Street's 5.5 percent estimate, and its margins expanded, Cramer said. Although the stock is down about $16 from its all time high it set last September, the price is up about 12 percent this year and about 21 percent in the past 12 months.

The host argued that Costco is poised to compete with whatever Amazon may have up its sleeve.

"I remain a big fan of Costco. I adore their membership model. I always re-up, which I think is one of the best value propositions out there right now, because the bargains at Costco are practically unbeatable," he said. "Costco can thrive because their membership model gives them a major edge."

Disclosure: Cramer's charitable trust owns shares of Amazon.

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