Pat McKeough responds to many requests from members of his Inner Circle. Every week, his comments on the most intriguing questions of the past week go out to all Inner Circle members. Each week, we offer you a highlight from these Q&A sessions. This week a detailed question from a member seeking stock picks to buy and hold.

Q: Pat: My wife and I recently sold her shares of Kroger Co. on the advice of our broker, who said his reports showed the stock had little upside potential. Normally I would not do this. As per your advice, we hold shares of solid companies for the long term. We are thinking of buying Kroger again, as we like the company’s overall philosophy. I can’t find much analysis on its prospects. Would you please do an update on this company and its long-term outlook? Thanks.

A: Kroger Co. (symbol KR on New York; www.kroger.com) started up in 1883 and is now the largest grocery store operator in the U.S. by sales.

The company has 2,625 locations (1,330 of which also sell gasoline), mainly in the southern, Midwestern and western U.S. In addition to Kroger, the company’s banners include City Market, Dillons, Food 4 Less, Fred Meyer, Fry’s, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith’s.

Kroger’s other operations include 782 convenience stores, 326 jewellery stores and 37 plants that make its private label baked goods and dairy products.

In its 2015 fiscal year, which ended January 31, 2015, Kroger’s sales rose 10.3%, to $108.5 billion from $98.4 billion in 2014. That’s mainly because the company purchased the Harris Teeter supermarket chain for $2.4 billion in January 2014.

On a same-store basis (which excludes fuel sales and the Harris Teeter acquisition), sales rose 5.2%, thanks in part to strong demand for organic and natural foods.

Earnings gained 18.1%, to $1.8 billion from $1.5 billion. Kroger spent $1.3 billion on share buybacks during the year, so per-share profits rose 23.5%, to $3.52 from $2.85.

Lower price of gasoline pushes up profits

The company paid less for gasoline in the last half of the year, which pushed up its profit margins. But one-time contributions to its charitable foundation and employee pension plan depressed its 2014 earnings.

Kroger’s long-term debt of $9.8 billion is a moderate 27% of its market cap. It also holds cash of $268 million, or $0.55 a share.

The company’s earnings should rise to $3.88 a share in fiscal 2016, but the stock trades at 19.2 times that estimate. That’s a high multiple for a company that faces competition from larger retailers like Wal-Mart and Costco. The $0.74 dividend yields 1.0%.

The stock shot up from $22 in mid-2012 to as high as $77 this year. It has attractive long-term growth potential, but its near-term prospects may be limited.

Inner Circle recommendation: HOLD. For new buying, we recommend several major Canadian grocery stocks in The Successful Investor.