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The Best Retail Stock for 2007 Is ...

More times than not, investors are the most bullish on stocks that have recently trounced the market. You know, the Google and Apple types.

That's why I was a little surprised to see that you voted a stock down nearly 40% in the past year to be The Best Retail Stock for 2007.

Let me back up for a moment. See, last week, we asked you to vote for your favorite retail stock for the upcoming year using Motley Fool CAPS, our new investing community.

You shunned the likes of Starbucks (Nasdaq: SBUX  ) , Chipotle (NYSE: CMG  ) , and Sears Holdings (Nasdaq: SHLD  ) , all of which have beaten the market over the past 52 weeks. And, despite an uncertain economic outlook, you dismissed discount retailers Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) .

Instead, you unanimously chose beaten-down organic-grocery store Whole Foods (Nasdaq: WFMI  ) as your retailer of choice for 2007.

Pass the tofu, please
So, what catalysts will drive Whole Foods' growth in 2007?

In her article supporting Whole Foods, Alyce Lomax noted Whole Foods' tremendous reputation, market positioning, and excellent leadership as three potential drivers.

But, as Alyce argued, it might be the company's financial strength and disclosure that make the difference for shareholders:

"There are still more reasons to like Whole Foods -- and not just because it's so profitable that it has been able to pay a dividend to its shareholders. It reports economic value added, or EVA, which is a metric that provides a much more long-term approach than quarterly earnings. In addition, it gives abundant data on its same-store sales. Over the summer, we were able to take a look at that data and determine that Whole Foods is able to coax impressive sales growth out of older stores for what may be a remarkably long time."

Other CAPS investors chimed in with their thoughts. From jensig:

"The Whole Foods in my city is constantly full of customers. The service is great, and the products don't compare to any other. The company's ethical standards are important to me, and I believe companies with good moral standing are becoming more valued by people everywhere. The brand name is also known everywhere. I am optimistic that once new stores begin opening, the stock will begin to improve. I bought in after the 30% drop, seeing it as a good opportunity to buy a stock that to me seemed suddenly very undervalued."

Champagne tastes
Despite Whole Foods' plunge over the past year, the stock still trades at a significant P/E premium to the general market, and much higher than other grocers such as Safeway (NYSE: SWY  ) .

The bullish argument here is that Whole Foods provides a premium service and should therefore trade at a premium. Hey, Starbucks has traded at a significant premium to the market for more than a decade, and it has returned 25% annualized returns over that period. Why can't Whole Foods do the same?

But unlike Starbucks, which doesn't have much in the way of major competition, there are a lot of hands in the organic game. Whole Foods must compete not only with other organic-food stores such as Wild Oats and Trader Joe's, but also with major grocers such as Wal-Mart and Safeway, which have added organic products to their lines.

Was Whole Foods' 40% slide over the past year a result of increased competition, or was it something else?

Now, a substantial price drop may not be indicative of long-term returns, but it should at least make investors take note and rethink future prospects.

Either way, even though the contest is over, you can still make your opinions heard, along with more than 20,000 other investors on Motley Fool CAPS. Simply follow this link to your free registration.

Todd Wenning owns shares of Starbucks but of no other company mentioned. Whole Foods and Starbucks are Motley Fool Stock Advisor picks. Wal-Mart is an Inside Value choice. The Fool is investors writing for investors.

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