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Why I'm Buying More Whole Foods Despite Doubtful Times

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Personally, I believe the overall market has been on a rabid bull roll for far too long. If there's much of an economic recovery, it's fragile at best. However, many investors don't appear to be willing to entertain the notion that at some point, reality could send stocks on a downward trajectory.

Despite my short-term pessimism -- don't get me wrong, I am a long-term optimist -- I've continued to buy stocks that I find ethical, positive, and willing to embrace a more positive future in their business models. I've chosen such stocks both for the real-money portfolio I manage for and for my personal holdings.

Granted, here lately I've been checking out some of my watchlist stocks that I would rather not buy right now. I'd like to see a temporary price drop on unwarranted pessimism before buying, or maybe even a little more confidence that their growth will pan out over the long haul.

I've got more I need to slide further under the microscope, but I believe caution is essential in today's market. Weaker companies are dangerous bets. (Take the recent Blackberry developments. Even without a bearish turn of the market, speculation and magical thinking has not worked out well for investors.)

In the spirit of emphasizing great companies appropriate for different market climates (bear markets yield better deals if one has the stomach for it), I've decided to add more shares of Whole Foods Market (NASDAQ: WFM  ) to the Prosocial Portfolio.

Why I'm increasing the position

Whole Foods is already a two-time purchase for the Prosocial Portfolio -- see my original buy article, and my second thesis.

To many investors, buying Whole Foods now may seem like a wacky idea. It's currently at its 52-week high, and its forward price-to-earnings ratio is 34. Still, history tells us that many investors think Whole Foods has almost always seemed like a wacky idea due to its reputation for being an expensive stock, and that's misguided.

At face value, Whole Foods looks (emphasis on looks) far more expensive than, say, rival Safeway (UNKNOWN: SWY.DL  ) , which trades at 18 times forward earnings. Of course, when pondering the future growth trajectory for Safeway, 18 times forward earnings actually looks rich to me. It's an extremely mature grocer with about 1,400 stores in the U.S.

Safeway's profit margins have been pretty stagnant for years, and rested at 27.6% last year. This year, the grocer's profit is expected to plunge, and revenue is expected to fall by 15%. That's just not appetizing.

When you compare that to Whole Foods, you can see hefty growth over the years since the recessionary period (and it excelled growth-wise prior to the financial-crisis dark years as well). The company has been growing net income and revenue at a steady clip. This year, it's expected to increase earnings per share by about 16%, with an 11% revenue increase. Here's why its profit margins are the envy of the industry: Last year, it was 35.5%.

Let's also consider a newer entrant into the publicly held grocer space -- one viewed as a more apples-to-apples comparison to Whole Foods. Sprouts Farmers Market (NASDAQ: SFM  ) didn't look like much of a contender to me when it fired out of the gate as a recent IPO, even though it's one of those admirable IPOs in which the company in question is profitable, and it grew revenue by 62.3% last year. Sprouts' gross profit margin of 29.5% isn't as impressive as Whole Foods'.

Still, Sprouts is still relatively small with just 160 stores, and Sprouts' net income in 2012 was just $19.5 million, reflecting its smaller size and footprint. It's trading at -- wait for it -- 80 times forward earnings at this moment, obviously buoyed by IPO fervor.

Obviously some investors believe Sprouts has a lot of room for growth, but it's still got a lot to prove. Whole Foods, on the other hand, has already proven a lot, and continues to do things differently.

Pushing beyond routine analysis
Many factors of Whole Foods' heated growth are likely misunderstood and underestimated. Whole Foods continues to forge the kinds of building blocks that have made it a phenomenal business over the years. These foundations have also made it a force for good -- which is even more essential for quality, in my opinion.

Whole Foods Market's stores support local suppliers, include products marked with its Whole Trade Guarantee (think: fair trade), operate with environmental sustainability in mind, and actively embrace community philanthropy. These are built into its highly profitable business while spreading good deeds around world.

Take its Whole Planet Foundation, with admirable initiatives both here and abroad. Over the years, I have been continuously impressed with some of the positive initiatives it embarks upon, and even saw an example of such beneficial fabric between the company and Costa Rica banana supplier EARTH University, which teaches students from all over the globe about sustainable farming and other sustainable business.

Here's another. Americans are becoming increasingly aware of childhood nutrition and the obesity epidemic. Whole Kids Foundation may be a little-known initiative, but it's a commendable one. It raises millions to help fund initiatives for healthier nutritional choices for American children. It's already provided 2,500 salad bars and 1,600 garden grants for schools, touching 2 million children. Whole Foods shells out for the operating costs while the programs themselves are funded by shoppers, employees, and some of the suppliers you can see on the shelves of any Whole Foods Market.

Whole Foods Market is one of the companies that functions in the way that capitalism should. The fruits of profitable enterprises boost all stakeholders involved, they don't take, and they certainly don't stunt the overall future.

Too many modern corporations do exactly the wrong things for the long-haul view while pushing for short-term profits. They run people over instead of supporting them. They treat employees and suppliers horribly, and couldn't care less about customers. They spend millions on lobbying, hoping they won't have to compete on a level playing field.

I may be overall bearish about the general market lunacy right now, but when it comes to individual, gold-standard companies, I'm not anchoring on price. We may have to ride the ups and downs with the greatest companies, but over the long haul, as long as such companies are steady in their vision and ability to evolve, we investors are going to do well.

Eventually we'll have to ride the market roller coaster down. However, great, innovative companies are built to excel in good times and survive and possibly even absolutely thrive in the bad. Meanwhile, the drive for kinder capitalism that helps form a vibrant economy is actually a severe market need that too few investors even see. Whole Foods fulfills that need, too.

Opportunities in paradigm shifts
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century, and Whole Foods is one such example. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

Read/Post Comments (2) | Recommend This Article (23)

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  • Report this Comment On September 30, 2013, at 2:41 AM, DalePlourde wrote:

    Great article re: Whole foods, very true there is much more growth potential especially considering the increasing interest in healthy eating by many consumers of all demographics. As well I certainly do also appreciate Whole Foods active involvement in adding to the progress and well-being of society, something which we all have a responsibility to do regardless of income ect.. It is very personally fulfilling to be prosocial. I donate about 25% of my capital gains from various companies I invest in to wildlife rehabilitation centres, amazing feeling to be able to do this. The reward is in watching an orphaned baby raccoon for instance being saved and taken proper care of then released once old enough back into it's natural habitat, to live out it's life. Or an owl whose wing is damaged regain it's ability to fly due to the care it receives. I am long Whole Foods, and Hains Celestial both with high PE's but with much more anticipated growth.

  • Report this Comment On October 09, 2013, at 10:50 AM, CMFStan8331 wrote:

    I'm a customer of both Whole Foods and Sprouts. IMO, Whole Foods offers the best shopping experience. Sprouts is probably a little cheaper on average, but their store in my area was formerly a Sunflower Market, and I did not see the change after the merger as entirely positive. One big difference: Sunflower's non-organic meat did not have antibiotics or hormones, and that policy changed after Sprouts took over. I definitely trust Whole Foods over Sprouts on any issues of food quality or ethical treatment of farmed animals and the environment. As an investor, I think Whole Foods is the clear choice between the two.

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Related Tickers

9/28/2016 4:00 PM
SFM $20.17 Up +0.02 +0.10%
Sprouts Farmers Ma… CAPS Rating: ***
SWY.DL $0.00 Down +0.00 +0.00%
Safeway CAPS Rating: **
WFM $28.42 Down -0.04 -0.14%
Whole Foods Market CAPS Rating: ****