High-end grocery stores are all the rage on Wall Street. But we think much better buys can be found among the traditional grocers, especially Kroger Co (NYSE: KR).

Americans are buying less-than-half their food at traditional grocery stores, relying more on discounters, such as Wal-Mart (NYSE: WMT), or high-end grocers like Whole Foods Market (NSDQ: WFM). But for daily essentials and last-minute meals we’re still opting for the nearest good grocery, which is often a Kroger.

With more than 2,400 stores in 31 states – in cities, suburbs and rural areas – Kroger is the second-largest US food retailer behind Wal-Mart. Its brands include Dillons, Food 4 Less, Fred Meyer, Ralph’s and Smith’s.

Kroger’s three-pronged strategy (see below) for battling both the discount and high-ender grocers is paying off, putting it in much better shape than competitors such as Safeway (NYSE: SWF). Since 2008, Kroger’s sales are up 6.6 percent annually and earnings up 5.6 percent. Over at Safeway, sales are up only 1 percent a year during this time, and it’s been losing money.

Last year, Kroger profits soared 24 percent (to $1.5 billion) on a 7 percent rise in revenue (to $96.8 billion). Just as impressive, Kroger’s same-store sales have risen 37 quarters in row. And despite intense competition, Kroger has held on to its market share. According to Nielsen Homescan Data for 2012, Kroger’s share was up 0.2 percent in 19 of its core markets.

At a recent price of $24, Kroger stock is up 33 percent so far in 2013. But we think further gains are likely, since average annual earnings growth here out is likely to accelerate to 8 to 11 percent, coupled with dividend increases and share buybacks.

Aisle Warrior

About 40 percent of what Kroger sells now – from cereals to pasta sauce – it makes at its own 37 plants. These private-label products are being increasingly snapped up by consumers because they cost less but are of similar quality to name brands.

Kroger’s vertical integration keeps profit margins from nose-diving due to price competition, which is key in the grocery business. Coupled with low commodity inflation, which we’ve had recently, Kroger’s gross profit margin is likely to remain at recent levels, around 20 percent.

Second, Kroger is offering locally grown and organic foods at competitive prices, to entice consumers away from specialty grocers such as Whole Foods and Trader Joe’s. Thus, Kroger is appealing to a wide variety of customers, from the health-conscious to the cost-conscious.

Finally, Kroger is rewarding repeat business with its “Customer 1st” program, which targets shoppers with special sales and personalized coupons. And it’s investing part of its excess cash flow (some $2.8 billion in 2012) to renovate stores and adapt them to local trends.

The Price is Right

Fairway Group Holdings (NYSE: FWM) went public in April and has seen its share price leap some 40 percent since then. Sprouts Farmer’s Market, with 157 stores in the Southwest, is preparing an IPO. And Whole Foods is trading for 34 times 2013 earnings estimates.

In comparison, Kroger stock is cheap. Based on the 2013 consensus earnings estimate of $2.77 per share, Kroger is priced at 12 times forward earnings, not much above Safeway’s 10 times. In addition, Kroger has a very safe and rising dividend (recently 15 cents per quarter), up 30 percent from last year.

In the coming year, we think more investors will be bagging Kroger shares.