Will Whole Foods Market Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Believe it or not, grocery stores that provide natural and organic food used to be tiny hole-in-the-wall places that attracted only a few die-hard customers. But Whole Foods Market (Nasdaq: WFM) changed all that, bringing high-value, high-margin organics and other specialty items to a mainstream grocery store format. Despite its nickname, "Whole Paycheck," the company has thrived, even during tough economic times. Where will the pioneering food company go from here? Below, we'll revisit how Whole Foods Market does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

• Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
• Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
• Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
• Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
• Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Whole Foods Market.

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Whole Foods Market last year, the company has picked up a point. Yet even with gains in free cash flow for the fourth year out of five, the stock's high valuation and minimal dividend still make it a tough sell for retirement investors, despite having risen almost 50% in the past year.

The grocery industry has been a tough place to make money lately. SUPERVALU (NYSE: SVU) had to cut its dividend and fire its CEO in order to try to initiate a turnaround from a collapse that cut 80% off its stock price. Safeway (NYSE: SWY) and Kroger (NYSE: KR) have fared somewhat better, but they still have razor-thin margins that are always under threat from trends like higher food costs and the recent drought.

Whole Foods, on the other hand, consistently posts high margins and amazing sales growth. With 26% average annual revenue gains over the past 20 years and 7% same-store sales growth in the past decade, even in a recessionary environment, Whole Foods has demonstrated its ability to retain customer loyalty and provide value for its shoppers. Moreover, with margins at levels three to five times what other grocery stores earn, a whole lot of that revenue growth falls through to the bottom line.

Lately, competitors are trying to emulate Whole Foods' success. The Fresh Market (Nasdaq: TFM) is a small East Coast grocery chain that's trying to duplicate Whole Foods' high-margin business, and, at least recently, it has accomplished that task. Given enough time, the chain may become a bigger threat to Whole Foods.

For retirees and other conservative investors, the tough thing about investing in Whole Foods is dealing with a sky-high valuation. Although growth has justified those high multiples in the past, there will likely come a time when the stock could see a serious setback. Only those willing to take that risk should consider adding Whole Foods to their retirement portfolios.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

There's a lot more to Whole Foods than meets the eye. Get the entire scoop from the Fool's top analysts as they take an in-depth look at the extraordinary store chain in the Fool's premium report on Whole Foods. It's there for the taking, so don't wait -- buy it today.

Add Whole Foods Market to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.