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Tickers in this Article: KR, MRK
In June of '06, I suggested that Kroger's (NYSE:KR) stock was worth $25 a share.

Then, after it hit my price target, I reiterated my buy in March of '07 and raised my price target to $30 (For the full article, read Kroger Headed Higher (KR). )

Well, the stock is almost at that level and, frankly, I'm itching to issue a sell recommendation.

Why Have I Soured on this Stock all of a Sudden?
Four words -- perceived investor relations error. Kroger's chief executive, David Dillon, recently made what I call a colossal mistake. In a letter to employees, Dillon put the kibosh on speculation that the company might be taken out by management in a leveraged buyout transaction.

Specifically, he said, "I want you to know neither management nor our board of directors has any interest in pursuing a leveraged buyout transaction." The comments were then disseminated publicly.

What's Wrong With That?
I am a big believer in honesty. And I really shouldn't fault the man for speaking his mind, but, at the same time, he took a major swipe at one of the catalysts that was driving the stock to begin with.

Now, don't get me wrong here, I'm not saying that Dillon should have lied, but maybe he should have been a little more careful about the situation, because down the line it might actually be an attractive option for management.

And because frankly, it reminds me of what Merck's (NYSE:MRK) CEO did around seven years ago.

Merck's Gaffe
I'll never forget it. I was listening to the conference call at that time and Raymond Gilmartin essentially suggested that Merck wasn't going to go down the road that other drug companies within the industry were.

That is, they weren't going to aggressively seek to partner-up with other pharmaceutical companies, or seek acquisitions or other combination deals.

Why? My interpretation of Gilmartin's comments were, because they were MERCK, and they didn't have to if they didn't want to.

I sat with my mouth wide open in amazement as Gilmartin effectively took the wind out of Merck's sails and many investors (who shared my interpretation) headed for the hills. And the sad fact is that, in many ways, Merck just hasn't been the same since.

I'm worried that perhaps Dillon just did the same thing.

PE Firms Could Still Step Up
Now, despite Dillon's comments, rumor has it that one or more private equity firms including KKR (Kohlberg Kravis Roberts & Company) may be kicking the tires. And frankly, I think it would make perfect sense for the company to go private at this point.

Why? It could save a bundle by eliminating all the reporting requirements that go along with being a public company, and by cutting the money the company doles out on press releases and its overall investor relations effort.

In addition, the company may be particularly attractive to a PE firm because of the roughly $189 million in cash, more than $700 million in receivables, and $11 billion in plant, property and equipment the company sports on its balance sheet (or at least, it did as of February). The logic being that those assets could help limit the downside risk.

That said, I'm not sure that I'd stay in the stock on the chance that the company will be bought out at this point. I mean why bother? The stock has had a nice run already hasn't it? Why be greedy?

The Bottom Line

I continue to believe that there's a chance that a PE firm could step up later this year and make a bid for the well-known grocer, and that the stock could trade into the $30s as the company reports improved earnings.

However, at this point, I'm a bit soured on the stock, and I suspect that others are too(including retail and institutional players who banked that management truly would entertain all options). Long story short, I think it's time to seek greener pastures elsewhere.

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