Rising Star Buy: Whole Foods Market

This article is part of our Rising Stars Portfolio series.

My Rising Star portfolio is designed with a socially responsible spirit in mind. If that sounds a little like bulk granola, well, wait till you check out this month's purchase. I'm buying shares of one of my personal longtime favorites, Whole Foods Market (Nasdaq: WFM  ) .

The business
Since 1980, Austin, Texas-based Whole Foods Market has turned the grocery business on its ear, over and over. There was a time when nobody thought a grocer that sold natural, organic foods could ever hope to compete against huge, conventional companies like Safeway (NYSE: SWY  ) and Kroger (NYSE: KR  ) .

Not only has Whole Foods competed, it's driven many old-school grocers to make major changes in their businesses. If you've ever noticed a conventional grocer remodeled and carrying more gourmet, natural, and organic items, you might look to Whole Foods as a catalyst.

Whole Foods has consistently been ahead of the curve when it comes to identifying forward-looking trends. It's capitalized off of the gourmet "foodie" trend. It's also been a safe haven for folks searching for local produce, foods free of gluten or genetically modified ingredients, vegan and vegetarian products, meats with animal welfare ratings, transparency in labeling, and all-around healthy eating.

Whole Foods has 300 stores in the U.S. and the U.K., and employs about 54,000 team members. It's highly successful and profitable; in the year ended September 2010, Whole Foods grew sales by 12.1%, to $9 billion, reported a 7.1% increase in same-store sales, and increased net income by 67.5%, to $245.8 million.

Why I'm buying
Whole Foods is quite emblematic of the types of companies I target for this portfolio. Its business takes many stakeholders into account, including workers. Whole Foods team members receive health-care benefits, and the company has an open-book policy on salary. Furthermore, executive compensation is currently capped at 19 times that of the average total compensation of all employees. Whole Foods calls this "shared fate."

This company is serious about how it can benefit the greater world as well as itself. Whole Foods gives at least 5% of its profits to community and nonprofit organizations each year. It also works hard on environmental initiatives; last October, the Environmental Protection Agency awarded Whole Foods a "Green Power Partner of the Year" award. Whole Foods is a three-time winner, and it was the only grocer to gain the recognition in 2010.

Whole Foods' founder and co-CEO John Mackey is a major proponent of the "conscious capitalism" philosophy, and his views comprise a huge component of the company's vision. His passion for Whole Foods's mission has been clear, and he's also well versed in why purpose-driven, stakeholder-friendly enterprises can be major successes on the competitive landscape.

And now, the risks
Whole Foods Market has long been one of the highest-priced grocery stocks out there, so I can understand why those who consider themselves more traditional value investors might shy away. Paying 36 times trailing earnings for a grocer is quite alien to them. Regardless, while stocks with high multiples are always a little risky, I believe that this company has what it takes to surprise us all with its future growth.

Mackey is a visionary, but he can be, er, outspoken. The "Rahodeb" incident in the midst of the Wild Oats antitrust probe was certainly a rough patch in the company's history, and that was a trying time for many of us longtime shareholders. (Not that some Fools didn't lighten it up a little.)

More recently, Mackey's ideas on how to fix the health-care mess in this country caused a ruckus, and even some boycotts. Even further back, Mackey made few friends when he tactfully compared unions to herpes. Still, in a corporate world that's often off the charts on the BS-O-Meter, it's nice to hear some honest and real discussion from a CEO, isn't it?

Last but certainly not least, the grocery business is teeming with competition. Beyond conventional grocers and discounters, we've also got private companies like Trader Joe's and Wegman's, as well as smaller, growing grocers like The Fresh Market (NYSE: TFM  ) and Ruddick's (NYSE: RDK  ) Harris Teeter. (Thanks to Fool community member RD80 for recently reminding me about Ruddick, since Harris Teeter is another rapidly expanding grocery play.)

Conventional grocers have taken Whole Foods' competitive edge to heart, and they probably try to emulate it in ways that go far beyond minor facelifts in older stores. For example, Wal-Mart (NYSE: WMT  ) has dabbled in initiatives like trying to increase its local produce, and Safeway recently topped Greenpeace's list of leaders in seafood sustainability.

Foolish bottom line
I wouldn't touch most grocery stocks these days. This sector's heightened riskiness isn't just about normal (and cutthroat) competition but also about major concerns like commodities inflation and shrinking consumer budgets.

Whole Foods' most recent quarter underlined the strength of its business compared with other grocers, though. Its stakeholder-friendly corporate mission and its innovative history of catalyzing major change in an old-school business gives me even more reason to like this stock for the far-off future.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Alyce Lomax owns shares of Whole Foods Market. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 17, 2011, at 7:58 PM, rd80 wrote:

    Thanks for the shout-out Alyce. Might as well add a Ruddick green-thumb to my CAPS picks and see how it does.

    I like WFM's growth and the net cash on the books. Not sure that's enough to justify the PE, but I hope it works out well for you.

  • Report this Comment On May 24, 2011, at 1:35 PM, TMFLomax wrote:

    rd80, many thanks again for the heads up about Ruddick. I am looking into that one and was glad for the reminder that it was the name behind Harris Teeter, which is also a really formidable grocer that I long thought was privately held. (Also interesting, is how a small part of Ruddick’s business is actually industrial embroidery/thread.)

    I’d also like to add a general comment; I heard from a representative at Whole Foods Market and they reminded me of a few elements that are helpful to Foolish readers who have not been following Whole Foods Market for that long: the SEC cleared John Mackey of any wrongdoing in the “rahodeb” incident; the Wall Street Journal op-ed controversy didn’t harm the company’s sales or profits (clearly, the company’s most recent quarter was really impressive); Mackey’s joke about unions was actually from several decades ago (I had no idea it was that old a quote, I guess some of us financial writers may “recycle” some information too much). Anyway, thought I’d put these out there for some added context for readers who are new to the idea of investing in Whole Foods Market.

    Best,

    Alyce

  • Report this Comment On February 08, 2013, at 2:02 PM, bassfishinfool wrote:

    How disappointing to receive an e-mail touting the 7 stocks for 2013 and it has reports that are 2-3 years old. Come on we can do better than that.

  • Report this Comment On February 08, 2013, at 11:37 PM, tlajoie11 wrote:

    The article says 7 stocks for 2013--I only find 2--where are the rest?

  • Report this Comment On February 08, 2013, at 11:48 PM, jamerv wrote:

    TMF is very good at that. A great headline but then no meat. That is turning me away from TMF.

  • Report this Comment On February 12, 2013, at 11:04 PM, irocpop88 wrote:

    The articles are from 2011! Really? C'mon you guys, is this what I'm spending my money for-- ancient news?

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