Whole Foods Market (WFMI)

I keep a list of growth stocks that I might be interested in buying if they ever tank enough to selll at less than 20 times earnings. Whole Foods Market, currently selling at 32 times earnings, is on the list. This stock has enjoyed phenomenal growth, but it has been in a downtrend for the last year. I have been watching for signs that WFMI is bottoming out, but recent developments lead me to believe that the company is headed for more trouble in the months ahead.
WFMI is currently operating 191 stores and it has plans to open 80 more this year. Whole Foods’ stores in large cities have certainly done well, but as the company grows they are of course forced to open their new stores in smaller cities, such as Birmingham, AL, pop 231K; Boise, ID, pop. 193K; Sugarland, TX, pop 76K; and Portland, ME, pop. 64K.

I think you need a much larger city to be able draw enough of the kind of customers who shop regularly at WFMI. You need people who have bought into the Whole Foods philosophy: people who feel better about themselves when they pay premium prices for goods that are readily available at better prices elsewhere. There may be 100K people like this in New York or Los Angeles, but how many are there in Boise?

WFMI also appears to be opening these new stores with a complete lack of insight into the sensitivities, loyalties, and regional traditions of smaller U.S. communities.

A Feb. 7 AP article, “Maine Whole Foods to Sell Live Lobsters“, illustrates the problem. Whole Foods is opening a 46K square foot store in Portland next week. Although they do not sell lobsters in their other stores “in the name of crustacean compassion”, they are planning to sell them in Portland. But, instead of buying lobsters off the Portland wharf several blocks away from the store, they are planning to use a New Hampshire distributor which meets their “demands for how the lobsters should be treated”. This has already caused incalculable PR damage in Portland. “I think it’s unfair to suggest that the 7,000 (Maine) lobstermen and hundreds of lobster dealers and retailers don’t know how to handle a Maine lobster,” said Kristen Millar, executive director of the Maine Lobster Promotion Council. Tom Martin, a Portland lobsterman, noted that “When they say they buy local and support local fishermen and farmers, and then they tell us we’re doing everything wrong, obviously it doesn’t sit very well with us.” If you are going to sell lobsters in Maine, you need to know that Maine people will not buy lobsters imported from New Hampshire, even if the crustaceans were originally caught in Maine waters.

Furthermore, to prevent customers from boiling their lobsters live in the traditional manner, Whole Foods plans to electrocute them in the store with a device called a “CrustaStun”. Tom Martin, the lobsterman, was quoted as saying: “A lobster electric chair? I wonder how that will sound for their public relations, that they’re going to give the lobster the electric chair.” And to finish off this public relations catastrophe, which must have alienated almost all of Whole Foods’ potential customers in Maine, P.E.T.A. weighed in on the issue: “Our expectation is that all Maine stores that sell live lobsters will have to implement animal welfare protocols in order compete with Whole Foods . . . ” Nothing could be farther from the truth.

It could be that Whole Foods is about to learn an expensive lesson. I am not a short seller, but this is tempting.

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20 Responses to “Whole Foods Market (WFMI)”

  1. hossblog Says:

    Alligator: The above calculation seems a little off. Are you saying there is one store in L.A.? There are around 20 in the L.A. vicinity. Is it worth comparing demographics? Have you looked at stores in smaller communities?

    Also, does one article on a newswire a p.r. catastrophe make? BTW the lobsters come from Maine, they are sold by a N.H. distributor.

    Please, do a little more research before research before giving out investment advice.

  2. Alligator Investor Says:

    hossblog,

    Thank you for your comments. Yes, I am aware that WFMI has multiple stores in large cities which do a good business, and I know that some of their stores in certain smaller cities also do well. My point is that I don’t believe that all of their new stores in smaller cities are going to do as well as their established stores, and it is going to hurt their bottom line. I think they need to carefully assess the granola/redneck ratio in any small city before deciding to open a store there, and I think they should seek the advice of local people in small towns before making business decisions in those small towns. I give the Maine example because I know the situation well. Believe me, people in Maine will not buy lobsters imported from N.H., even if the lobsters originated in Maine! Finally, let me say that I do not give investment advice. This blog is strictly for my own entertainment.

  3. poppy8sd Says:

    Lobster –bad PR move for Whole Foods? Probably. So what? What does that have to do with the stock? –Where it’s headed? A candidate to go long/short?

    It’s probably a good thing you write such “strictly” for “entertainment” –for yourself. If your ‘entertainments’ are basis for investment ‘advice’ –strictly for yourself, amusing? Despite your–arbitrary–‘ratio’ claim, you reveal: your investment decisions based on fundamentals. So long as that’s true, you will be running in circles, chasing your proverbial tail.
    –Fishing, read guessing, for bottoms; not knowing when to get in, when to close a position; when/where money is pouring into a stock, and the reverse; in with the crowd, looking for tips, “good” management, etc., who buy high, sell low. But then it’s all irrelevant, Whole Foods: trades on NASDAQ. I think of NASDAQ as a bucket shop, all of it, always.

    Ah well, if it wasn’t for the herd, how could insiders and serious traders make any money.

  4. Alligator Investor Says:

    poppy8sd: I try to respond to all comments, but I am having difficulty understanding yours!

    WFMI has been going down because the market perceives that their exponential growth rate is slowing. I see evidence that the growth rate could slow further. I am watching it because I might become interested if it goes down enough to sell at a P/E ratio of 20 or less. WFMI would have to fall to 28 to interest me this year. I am a value investor, and I am not a short-seller. My technical analysis opinion of the stock is that it is in a strong downtrend, but I see some divergences and I think it could rally sharply from here.

  5. poppy8sd Says:

    It’s all there, for those who understand the market. But If my post: difficult to understand, just chalk it up to being tired when I wrote.

    1. taking a stock position using fundamentals: worthless
    2. ” ” ” ” “PE ratio”: MAJOR worthless
    3. ” ” ” ” ANY stock on NASDAQ: serious mistake
    4. “Market perception” and “growth rate”: utterly worthless junk;
    the sort of stuff insiders put out to get ‘customers’ into the “tent” –so the insiders can make money and cash out

    “…growth rate could slow further…my…opinion of the stock…strong downtrend, but…some divergences…it could rally sharply…a value investor, and I am not a short-seller.”

    YOU don’t find THAT ‘difficult to understand’??? –Devoid of logic –missing POINT of entry/exit basis??? It is the stuff of a confused unschooled mind, with or without lobsters. One cannot make money on a stock with such material. Clear enough?

    A broker once said such things to me that you wrote. Made no sense, to me. Then one day I asked a question. She didn’t answer the question, she laughed. It was the last straw: I went to the library, started in upper left corner, ECONOMICS section. If an author claimed “X” I looked at decades-old WSJ papers; if I couldn’t find proof: book went back on the shelf. Read every book until I got to bottom, right. When I finished reading: I understood how the Market REALLY works, not how insiders WANT people to think it works; what’s useful, what isn’t; how worthless
    “PE Ratio” and more. Then spent additional months: learning how to trade.

    You could benefit from such self-education: you don’t know what you’re talking about. Or rather: what you’re saying is irrelevant –to making money on stocks.

  6. Alligator Investor Says:

    Would you care share the trading techniques that have made you so successful, or do you limit yourself to making vague and anonymous claims about your superiority, and insulting the work of others?

  7. danielnorman Says:

    I enjoyed the exchange about WFMI. I bought after the steep decline earlier this year. Value investing: when you can buy a first class proven operation with an established market position, value people buy. Of course, it’s gone down. The issue is patience. Markets react overexuberantly on the up-side, and correct too much on the down-side. Patience. Mr. Aligator’s points are very fundamental: Portland, ME — same affluence as Vienna, VA (suburbs of Washington, DC, and very nice income and demographics)? Not likely. Nevertheless, value people will hold until Mr. Market gets valuation right. What Mr. Aligator is doing is thinking ahead of the herd, focusing on big fundamentals. That is the only strategy which will allow non-institutional money to prosper. Mr. A: please keep on doing what you’re doing. DN

  8. Alligator Investor Says:

    Daniel, thanks for the encouragement. I agree that patience is a key trait of successful investors and I wish you well with your investment. I see a good reason for you to be optimistic, at least in the short term – it looks to me like the sellers capitulated during the last week of January. I would have bought it then if the fundies met my criteria. The 42.13 low has held, but I wouldn’t be surprised if renewed selling appears as it approaches 50.

  9. dedicated granola Says:

    I think it might benefit you to research not just the small town the stores are opening up in, but also to the surronding other towns there. I have known people to drive 100 miles or more to ‘stock up’ on wholefoods market products. Just because the town that the store is going to open up in has 200k people the surrounding towns will most likely have another 100-300k people which would then drive up the number of people within a reasonable driving distance. Also, the drop that the stock took after it was anounced the company would not have double digit growth and only single was due (in my opinion) to short term investers getting out to try and make a quick buck somewhere else. Trends like that are what hurt (once again imo) the long term investers. I personally will continue to hold on to my stocks and continue to buy them at this great rate. I see WFMI as a great company with a great mission and awesome potential for growth. Sure 8% growth is not as great as 10% growth; however growth is growth and I am therre for the long term.

  10. the kid Says:

    Yo get your head out of your ass and go pick up some organic friut and granola, it might help your sluggish (to much fast food buddy) view on this stock….by 2009 WFMI goes to 75 smackaroos a share !!!!!! Whewhew!!!!! Im rich biotch….

  11. Gualberto Diaz Says:

    I think your analysis of the price points between Whole Foods and regular supermarkets is somewhat off. When you compare the same products, as an example let’s use “Tropicana” OJ, Whole Foods will have the same price points as the local supermarket. They have to. Nobody is going to pay a premium to buy a product just for a shopping experience, even in the big cities.

    The difference between WFMI and the local supermarket is that the local “cheaper” supermarket shopper sees the Tropicana brand as the upgrade to the generic supermarket brand. WFMI doesn’t carry the generic brand, but maybe a freshly squeezed OJ mix made that morning. So the while they still offer the shopper the ability to buy Trop at a competitive price, they allow the shopper to buy something better at a higher price.

    It’s kinda like buying a car. You can a a cheaper car and get it fully loaded and the price would be equal to a basic more expensive car. I think they’ll do fine in the local markets going forward. With regards to Lobsters, I don’t think any mistake they make would be so incorrigible that nobody would shop there. Walmart has proven that. But I feel the stock was priced to perfection, and it’s just a correction as investors realized growth wouldn’t be as fast as they expected.

  12. Jeff Ventura Says:

    LI — don’t short WFMI, but don’t buy yet either. Put your money somewhere else, like AAPL or some standard, boring mutual fund. Like you, I’m waiting for WFMI to go on sale before getting in. It’s just too pricey right now.

  13. Alligator Investor Says:

    Gualberto – Thank you for your intelligent contribution. You have made some good points. I do like WFMI. It is a strong and well-managed company – they have a unique niche and a lot of loyal customers. They have also been treating their employees and stockholders well and I admire that. The only problem I have with WFMI is the valuation of the shares. The grocery business is very competitive, and I think they are facing some serious headwinds going forward. Declining momentum in their growth rate seems inevitable to me. The grocery business is an inherently low-growth proposition. They can’t afford to alienate potential customers in new markets as they have done in Portland.

  14. Gene Says:

    Hey Alligator.
    I drew up a chart of WFMI. Looks like it still has some pressure, but once above the 50 day moving average, it could be a good buying opportunity. The chart is on my blog. I enjoyed your valuations of the stock. Good luck with your trading.

  15. Alligator Investor Says:

    Gene,

    Nice blog, and nice chart of WFMI. I agree with your analysis. If I were a short-term trader, I would be looking to get long on a thrust above the 50ma, with an initial target of 50.

    After that I expect strong resistance at 50, and another decline to test the January lows. If we do get a broad market selloff soon as I expect, this one could tank hard, and fall into a value zone where it might appeal to curmudgeons like me.

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