How I Missed a 3-Bagger

Ordinarily, I'm the biggest fan of socially responsible companies. I generally prefer to invest in organizations that are trying to make the world a better place, and my time horizon tends to be very long term. This time, however, was different.

In July 2009, shares of Whole Foods (Nasdaq: WFM  ) had been hit very hard in the previous 12 months, losing nearly 20% of their value. Here was a great, socially responsible company trading at a significant discount. Surely the time was right to pick up some shares. And yet...

Conscious what?
Our economy was in rough shape, with unemployment having soared to 9.5%. And I was very skeptical, in the midst of the Great Recession, of investing in a company that was nicknamed "Whole Paycheck." Anecdotally, I had cut back on my own shopping at Whole Foods, and I'm a bit of a spendthrift. What would more prudent people do?

Before investing in Whole Foods, I needed to know that it had a plan for dealing with the tough economy and the perception that their prices were too high. Fortunately for me, Whole Foods CEO John Mackey was visiting the Fool in July 2009. I just knew that he'd be able to address my concerns about the company.

I was wrong. Instead of talking about declining comps and flat sales, he spent his entire time telling us about "conscious capitalism." Conscious what? Our economy had just fallen off a cliff and he wanted to get all touchy-feely on us? Needless to say, I was very concerned.

Shortly after Mackey's talk, my colleague Alyce Lomax wrote an excellent summary of it for Fool.com. In a nutshell, conscious capitalism is a type of economic activity that is about more than just making money. Rather, consciously capitalist enterprises are about big ideas that soar far above narrow self-interest. These enterprises are run on behalf of all stakeholders, not just investors.

Betting against conscious capitalism
Mackey pointed to several examples of these types of companies. Microsoft (Nasdaq: MSFT  ) was one such enterprise that he singled out as being built around the exciting idea of a personal-computing revolution. He also highlighted Southwest Airlines (NYSE: LUV  ) and Nordstrom (NYSE: JWN  ) for their commitment to outstanding customer service. Finally, he praised Google and Genentech for their dedication to discovery and the pursuit of truth.

I found myself admiring Mackey's idealism and truly appreciating his more noble view of business, especially after the breakdown in values that resulted in the financial crisis. But was this the sort of thinking that would allow Whole Foods to overcome its grave challenges in the summer of 2009? I was certain it wasn't. So certain, in fact, that I predicted Whole Foods would underperform on Motley Fool CAPS.

Now, more than two years later, I can say that I was wrong. Really wrong. On this particular recommendation, you can score it as a victory for idealism over narrow utilitarianism. Go, idealism!

I picked Whole Foods to underperform on July 15, 2009, when it was trading at $21.05 per share. It is now trading at $67.91 per share. Had I bought shares on that day back in 2009, I'd be sitting on a gain of 222%, which is a three-bagger in Peter Lynch's parlance.

But I didn't buy shares that day, and I totally missed an impressive comeback. For the first quarter of fiscal 2010, Whole Foods reported that net income was up 71%, and that sales were up 7%. Alyce Lomax reported at the time that fierce competition from Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) "didn't put a dent in Whole Foods' recovery." In the following quarter, Mackey reported that "our second quarter results are the best we have reported in several years." The company's efforts to provide cheaper items were beginning to pay off with many customers. And others were willing to start paying up for quality again. Who would have guessed it?

How I was wrong -- let me count the ways
Actually, lots of folks would have guessed it. So what did I learn from my unwise, bearish call on Whole Foods? Here are three lessons:

  1. I had just assumed that the severe downturn would continue and that shoppers would abandon higher-end grocers. Clearly, this was a failure of imagination on my part. Fool co-founder David Gardner often teaches us to consider multiple futures for any potential investment idea. For me, I was locked in on just one future, and it wasn't a rosy one.
  2. Just because John Mackey wanted to talk about "conscious capitalism" didn't mean that he wasn't focused on the details of the business. This one is so obvious that I'm embarrassed to admit it in a public forum. I just assumed he didn't have his eye on the ball. I assumed wrong.
  3. Finally -- and perhaps most important -- great companies find a way to overcome difficult environments. Whole Foods is clearly an outstanding company that is head and shoulders above its competition, in my opinion. It's not smart betting against such companies. Starbucks (Nasdaq: SBUX  ) is a perfect example of another excellent company that rebounded spectacularly after having been hit hard by the Great Recession.

Winston Churchill once said of an opponent that he was a modest man who had much to be modest about. Investing will make all of us feel very modest at times. It's very important to remember that every once in a while.

If you'd like to learn about another retailer that is known as the "Costco of Latin America," then be sure to have a look at our latest free report. Click here to start reading now.

John Reeves owns shares of Google and Costco. You can follow him on Twitter @TMFBane.

The Motley Fool owns shares of Starbucks, Whole Foods, Costco, and Microsoft. Motley Fool newsletter services have recommended buying shares of Starbucks, Costco, Microsoft, Southwest Airlines, and Whole Foods, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. 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 (5) | Recommend This Article (29)

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 December 01, 2011, at 6:34 PM, Darwood11 wrote:

    Thanks, John.

    I do have to say that, even my spouse realized that buying at "whole foods" was a costly proposition. One of the relatives calls it "whole paycheck."

    I can't comment on the situation in the rest of the country, but here in a suburb of Chicago, even the local Safeway has organic produce, and quite a wine and cheese selection. Of course, there is also "Trader Joe's."

    I was somewhat surprised during a visit to Whole Foods a week ago, to see that they had a "house brand" of low cost wines. That's a good sign. Will they continue to do well? I don't know, but if my household is any indication, we spend less than 10% of our grocery budget in that store.

  • Report this Comment On December 02, 2011, at 11:25 AM, DuncanMF wrote:

    Whole Foods has created a 'sticky' shopping experience for those that share their values. They'll have their imitators - but that just serves to flatter an innovator like Whole Foods.

  • Report this Comment On December 02, 2011, at 4:07 PM, 48ozhalfgallons wrote:

    Speaking of BMW's and "Mercades": I used to drive my boss about a half dozen times a year to retrieve her Bemer from the dealership's garage. Repairs such as fuel pumps, wiring harnesses, transmissions, stuff like that. The routine rendezvous at the repair shop were provided by my 250k, tires and oil changes only Ranger. My superb little pickup's life ended when a uninsured drunk driving a Mercedes broadsided it.

  • Report this Comment On December 04, 2011, at 9:23 PM, MajorBob04 wrote:

    I found "I Know First". Interesting. What is "YTS"?

  • Report this Comment On December 12, 2011, at 1:19 PM, bmcle11 wrote:

    John,

    Interesting but I think stops short of the real underlying message. Yes, there are a number of companies that have and/or are embracing what you identified as "conscious capitalism" as part of their corporate business model. That does make a good story in the U.S. and as long as it can be done profitabily they are doing well and maybe even getting a premium.

    But if I use your date of mid-July 2009, companies that had great management teams, a clear vision of value add and a growth path within their business that lead to revenue and earnings growth have done extremely well. Nordstrom (you mentioned) is up 2.4x, Starbucks 3.1x and even IBM 1.8x.

    So I think the real story is that after the meltdown of 2008 and the rebound starting the end of March 2009 investing in any company that had the attributes of management, vision,growth path and operational excellence did extremely well. There may be some premium for conscious capitalism, but that is difficult to measure.

    PS...I bought BAC, C and GE thinking they would rebound. What a mistake. Now, I do own Starbucks and IBM.

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