If you've bought Whole Foods Market (WFM) stock anytime in the past two years, you're probably not very happy about what's happened. In a nutshell, one of the great growth stocks of the past 15 years has been an absolute dud, unless you decided to sell out last October:
While the rest of the market was on a tear, Whole Foods' stock has fallen, as much as 41% if you bought at the peak. Instead of telling you why you should hold your shares -- I have no intention to sell mine -- I want to share an investing parallel from almost 40 years ago. A little context about the importance of patience and time will serve us all well in the interim.
Let's talk about The Coca-Cola Company (KO -0.46%), and 1975.
Selling the world a Coke, but Mr. Market wasn't buying it
Back in the '70s, Coca-Cola was already all over the world, but it was still relatively early in its expansion. Most of the world was much poorer than today, and consumer goods like Coca-Cola weren't either affordable or readily available to the masses. This is the Coke of the 1970s:
However, the stock market wasn't buying it:
We're talking about almost five years of being handily outperformed by by the market. This is by far a worse beating than Whole Foods investors like me have taken, and for a much longer period of time.
The Whole Foods/Coca-Cola parallel
On the surface, these don't seem to be very similar businesses at all -- I get that. But when you peel back the layers, there are a handful of characteristics that today's Whole Foods shares with 1975 Coca-Cola.
- Very high-quality businesses
- A stock that is perceived as "expensive" based on price-to-earnings valuation.
- Serious competitive challenge on the rise.
Warren Buffett didn't invest in Coca-Cola -- one of his signature investments -- until a century after its creation by John Pemberton. Source: public domain.
The market sentiment for Whole Foods right now is that the company's growth days and fat margins are long gone. Wal-Mart is making a big push into organics; Sprouts and other upstarts are all trying to take a slice from what has been a relatively unchallenged market for Whole Foods over the past 20 years. All of a sudden, it seems that the worst is happening.
In 1975, PepsiCo launched its "Pepsi Challenge" marketing campaign, and actually started taking market share from Coca-Cola. At one point in 1978, Pepsi's stock had actually gone up almost 50% while Coke shares were basically flat. However, Coca-Cola the business would continue to sell its trademark product, produce profits, and expand sales both domestically and internationally over the half-decade that its stock was a loser.
Here's what Coca-Cola stock has done since 1980:
In short, we're talking about one of the best stocks to own over the past 35 years. An investment of $1,000 turned into $56,200, before dividends. With dividends, we are talking about turning a grand into more than $101,000. It gets even better: That $1,000 investment in 1980 would be paying about $1,600 in annual dividends today.
Think about that for a second: paying back 160% of your original investment to you, every single year!
Whole Foods' advantage goes far beyond just fresh organics.
The long view is really hard to take
The thing is, we're hard-wired to think that what's happening right now will keep happening. The result? It's hard to imagine that Whole Foods -- much like Coca-Cola back in 1975 -- is still a best-of-breed company, with raving fans of the brand and what it stands for. Businesses face competition all the time. Think about today: There's arguably more competition in most industires today than there has ever been. Yet corporate profits are higher than ever.
The point? Competition isn't always (or even usually) a death knell; especially for the excellent business with real advantages, like the power of its brand, the quality of its product, and the loyalty of its customers. And just like Coca-Cola for the past 120 years, Whole Foods Market has an enduring brand that engenders loyalty from its customers.
Foolish final thoughts
Am I telling you that Whole Foods will be the once-in-a-generation stock that Coca-Cola was 35 years ago? Maybe not in so many words. But what I most certainly am saying is that -- even with increased competition -- Whole Foods is an undeniably well-run business with some very real -- and very durable -- advantages that its price-driven competitors won't be able to erode as easily as it seems.
If you've bought Whole Foods stock in the past couple of years, relax. It's been only a couple of years, and you still own the same portion of the same great business. Don't mistake Mr. Market's reaction for an indication that the business is failing. Plenty of investors did that with Coca-Cola, and you see what they missed.
