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I'll be the first to admit it: Whole Foods (Nasdaq: WFM  ) has had a great run over the past two years, and it's a little pricey today. But in an effort to emphasize the "motley" in Motley Fool, I'm going to take fellow Fool Jacob Roche to task, as he persuasively argued that the company was no longer worth his CAPS confidence. I beg to differ, and I'll show why.

The bear case
Make no mistake about it: The investing metrics are definitely on Jacob's side -- and the side of any value investor, for that matter. Here's a rundown of why Jacob doesn't think Whole Foods is worth your investment dollars anymore:

  1. The company's P/E is almost 40, while the rest of the grocery sector is hovering around 16.
  2. The company's PEG ratio sits at 1.38, while the rest of the sector sits at an undervalued 0.93.
  3. The company's enterprise-value-to-free-cash-flow metric sits at 24 -- not surprisingly above the industry average of 21.6., and well above the measly 15 that that the big three grocers -- Safeway (NYSE: SWY  ) , Kroger (NYSE: KR  ) and SUPERVALU (NYSE: SVU  ) -- currently post.

I did some research, and I have to say, Jacob's done well with his pick, too -- his initial bullish call on the company was up almost 150% when he ended it, versus a market return of just 9%.

Why the bears will eventually be wrong
There's certainly a chance that over the next year or two, Whole Foods may underperform the market. But over the next five to 10 years, I have little doubt that the company will outperform, and I've put my money where my mouth is.

My reasoning is quite simple: I believe that under "normal" circumstances with "normal" companies, Jacob's valuation and decision to end his CAPScall makes total sense. Unfortunately for the bears, I think anyone who frequents a Whole Foods would tell you that this situation is anything but normal.

First of all, and most importantly, I simply don't think it's fair to group Whole Foods in the same company as Kroger, Safeway, SUPERVALU, and the like. The comparison with other grocers, though, is the basis for Jacob's argument.

Though Whole Foods has redefined the grocery-shopping experience, it is far more than just a grocer -- it's a leader in helping Americans redefine their relationship with food. The company's auxiliary programs are helping to educate the next generation about sustainable food.

And with Whole Foods' acquisition of Wild Oats in 2008, I simply don't think Safeway, Kroger, or SUPERVALU stores have the same kind of sway that Whole Foods does in the organic market. Sure, The Fresh Market (Nasdaq: TFM  ) may be trying to play Whole Foods' game, but as Jacob pointed out, TFM "only managed $481 per square foot in 2010" -- compared with Whole Foods' impressive $804 per square foot.

Furthermore, the organic movement is growing in ways that astound. Consider the facts for the past 12 years.


Total Food Sales

Organic Food Sales

Organic Penetration

1998  $454,140  $4,286 0.9%
2000  $498,380  $6,100 1.2%
2002  $530,612  $8,625 1.6%
2004  $544,141  $11,902 2.2%
2006  $598,136  $16,718 2.8%
2008  $654,285  $22,900 3.5%
2010  $667,500  $26,700 4%
CAGR 3.26% 16.47%  

Source: Organic Trade Association. Sales numbers in millions.

Right now, the big three grocers account for more than 6,500 stores -- an astounding number. Whole Foods, on the other hand, has just over 300 stores -- an astoundingly low number, when you think about it. The company has a stated goal of 1,000 stores total, but there's no telling where demand may take that figure.

Finally, as I've shown, the organic food Whole Foods offers is cheaper than what others have to offer. As consumers get more and more educated about the benefits of healthy, organic eating, Whole Foods can be the cheapest option out there.

Investing in big ideas
I think an investment in Whole Foods is akin to an investment in the organic movement -- a big idea I'm willing to bet my money, and my All-Star profile, on.

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Fool contributor Brian Stoffel owns shares of Whole Foods. You can follow him on Twitter at @TMFStoffel.

The Motley Fool owns shares of SUPERVALU and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of The Fresh Market and Whole Foods Market and buying calls in SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (2) | Recommend This Article (12)

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 February 24, 2012, at 7:17 AM, ElCid16 wrote:

    KR and WFMI are both in the midst of pretty aggressive CapEx/Expansion campaigns, while SVU and SWY have seen CapEx spending less than depreciation for about 3 years or so. This makes KR and WFMI's FCF look less attractive, and SVU and SWY's seem more attractive. It's probably more indicative to use EV/EBIT or EBITDA to compare these companies. I just wouldn't lump Kroger in the same category as SVU or SWY, especially from a valuation perspective.

  • Report this Comment On February 27, 2012, at 11:35 AM, BSDFool wrote:

    I'm not sure what TFM making less per square foot has to do with the price of WFM. TFM have bigger, more comfortable stores, and they're building their own buildings. The truth is that TFM is pantsing WFM here in South Florida, so they're going to hurt WFM's profits in every market where they open. They have a better product, slightly better price with a non-supermarket feel. WFM just feels like a rip-off; TFM feels like you're paying for a product that is actually worth it. Whether TFM is worth it's price is another matter, but as they expand, they're taking market share from WFM.

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10/21/2016 4:00 PM
WFM $28.08 Down -0.21 -0.74%
Whole Foods Market CAPS Rating: ****
KR $30.76 Down -0.16 -0.52%
Kroger CAPS Rating: ****
SVU $4.50 Up +0.04 +0.90%
SuperValu CAPS Rating: **
SWY.DL $0.00 Down +0.00 +0.00%
Safeway CAPS Rating: **
TFM.DL $0.00 Down +0.00 +0.00%
The Fresh Market CAPS Rating: ***