Throw This Stock Away

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I'm not going to win any popularity contests around Fooldom this week.

This weekly column affords me the opportunity to bash a stock, and this time I'm swinging at one that I know is a favorite of many of my fellow Fools.

I'm not a bad person. I also come back with three stocks that I believe will outperform the company I'm dissing. It's only fair. It's even organic. And speaking of which …

Who gets tossed out this week? Come on down, Whole Foods Market (Nasdaq: WFMI).

Soy bomb  
Even bulls will concede that Whole Foods isn't a thrift haven. For three years now, we've been kicking around the "Whole Paycheck" joke -- implying that the upscale grocer should change its name since it swallows entire payday checks. 

Obviously, this isn't going to be a healthy climate for a company that commands a premium for its wares. You can probably draw parallels to Starbucks (Nasdaq: SBUX), as another premium-foodstuffs chain that's caught between a rock and a hard economy.

However, a lot of the natural-foods retailer's woes began before the recession coated the globe. Whole Foods has plenty of self-inflicted wounds, including ground-beef recalls, a case of jumping the gun on the Wild Oats purchase, and its CEO's embarrassing Rahodeb fiasco, enough to give any bear plenty of ammo to fire at the company's poor judgment.

Then you hit the bottom line. Analysts see earnings falling in 2009. That would be the third year in a row in which Whole Foods clocks in with lower net income. Wall Street sees the grocer on the redemptive growth path next year, but we've been down that unpaved road before.

At this point last year, analysts expected Whole Foods to earn $1.58 a share in 2009. Those same pros now see the company earning less than half as much this year, or $0.74 a share. Is Whole Foods really worth 26 times this year's projected profitability, when trends of penny-pinching shoppers and mainstream grocers expanding their organic offerings are bound to continue?

Investors seem to think so. The stock has soared 135% since bottoming out in November, even if we're still waiting for tangible proof of a turnaround. Comps, profit, and revenue all fell during the company's most recent quarter.

Until Whole Foods does bounce back and trades at a reasonable valuation, your best bet is to follow its suspended dividend out the door.    

Good news
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.

• Hain Celestial (Nasdaq: HAIN): If you believe in organic eats, why not go for a Whole Foods supplier that's also riding the wave of greater distribution through other retail outlets? This is the company behind Terra chips, Soy Dream soy milk, and Garden of Eatin' snacks. The company's latest guidance has it earning $1.25-$1.30 a share this year before charges, yet the stock's price is lower than Whole Foods' is. Hain Celestial also owns the Celestial Seasonings tea brand, which segues naturally into my next recommendation.
• Green Mountain Coffee Roasters (Nasdaq: GMCR): Despite the environmental knocks on its disposable Keurig K-Cups, this coffee company is committed to earthy initiatives. The company releases annual corporate social responsibility reports and is dedicated to countering climate changes. On the fundamentals front, Green Mountain is bucking the trend among many of its "green" pals by actually growing. Sales rose 60% and earnings more than doubled in the company's latest quarter. Its single-cup brewers are a hit, and even Wal-Mart Stores (NYSE: WMT) recently hopped onboard as a distributor.
• Chipotle Mexican Grill (NYSE: CMG) (NYSE: CMG-B) - The "food with integrity" burrito shop isn't heading in the wrong direction. Comps, revenue, and earnings rose in its latest quarter, during the same period in which those three metrics went the wrong way at Whole Foods. Yes, this is one of the rare premium-foodstuff chains that's growing these days. It's true that Chipotle isn't growing as quickly as it used to. Comps growth is also the result of menu price increases, since traffic died down this past quarter. Then again, at least Chipotle has the flexibility to raise prices and grow operating margins in this brutal environment.

And that's the Whole story.

Other headlines out of the weekly garbage:

• Whole Foods Wraps Up a Marbled Quarter
• Death to Rahodeb
• It's So Much Worse Than You Think