Organic foods retailer Wild Oats Markets (NASDAQ:OATS) is my "natural" choice for the worst stock of 2007 -- not because I believe management is dishonest or that their products are useless (tasteless maybe, but certainly not useless). Nope. Wild Oats is indeed a legitimate business operating in one of the fastest-growing areas in the retail food industry, and that's the problem.

Unlike many of the other Foolish candidates for "worst stock" that so clearly have dysfunctional business models, incompetent management, or wildly overpriced shares, it would be relatively easy for investors to be lured in by Wild Oats' prospects. Well, I'm here to help put a stop to this wild ride.

Let's take the lipstick off this organically altered pig and expose it for what it truly is -- an investment dog that's also worthy of your unhealthy choice for 2007's most rotten stock.

Wild Oats in a whole market of hurt
Three words pretty much capture the essence of my extremely bearish attitude toward Wild Oats: Whole Foods Market (NASDAQ:WFMI). Simply list the reasons why Whole Foods is the undisputed leader in the organic foods industry, and you'll understand why Wild Oats isn't (and why it's not even close).

Besides being a Motley Fool Stock Advisor selection, Whole Foods is the biggest, most successful, and best managed organic foods retailer. Visionary leader John Mackey, who founded the company in 1980, continues to grow the company profitably behind the strength of empowered employees (with lots of stock options) and a corporate culture that is unparalleled in the industry. Oh, and did I mention that he takes a $1 salary for his efforts?

Where's the wild moat?
Wild Oats, on the other hand, has consistently lost money, is barely profitable now, and is currently being managed by "turnaround specialists" (who have a chunk of their compensation tied to short-term price appreciation, rather than long-term organic abundance). In addition, Wild Oats' small stores, which average about 30,000 square feet, simply don't allow it to garner the buzz, herd-ish loyalty, and operating efficiencies that Whole Foods' 70,000 square foot superstores give it.

Now, Wild Oats would like you to believe that their small stores are actually a point of differentiation from Whole Foods and other megagrocers now competing in the natural foods space -- like Kroger (NYSE:KR) and Safeway (NYSE:SWY). For example, according to Wild Oats' most recent 10-K: "Our stores are smaller in size and less expensive to build, which gives us access to markets that may not have the diversity believed necessary to support large stores."

Naturally, that's a nice spin, but doesn't make sense. Being "different" is only useful if it somehow, some way, earns above-average returns either through premium pricing or low-cost undercutting -- something that Wild Oats does neither of particularly well. But don't just take my word for it. Take a look at some key operating metrics of the companies I've just mentioned.

The numbers tell the sad story of a wild child trying to compete with some big enchiladas.

Nutritional facts


Return on Capital

Operating Margin (EBITDA/Sales)

Net Margin

Whole Foods Market












Wild Oats Markets




Clearly, Wild Oats has its bushels at the bottom of the barrel when it comes to the organic foods game -- all in terms of operating and net margins, returns on capital, and even brand cache. It's obvious that any investor looking to take advantage of the growth in natural foods would do a whole lot better betting on any of the companies mentioned above besides Wild Oats.

Vote the Oat as the biggest goat
And there's your organically prepared meal, Fools. Do you agree that Wild Oats is spoiled enough to be 2007's worst stock? If so, head over to our Motley Fool CAPS community and hand Wild Oats an underperform rating. Of course, if you've been drinking too much naturally squeezed asparagus juice and actually like Wild Oats as an investment, simply give it an outperform rating. We'll declare the big winner, uh, I mean loser, early next week. Click here to voice your opinion.

Want to go back to the beginning of our Worst Stock for 2007 tournament? Right this way.

Foolish contributor Brian Pacampara is as wild about oats as he is about brussels sprouts and has no position in any of the companies mentioned. The Fool's disclosure policy is always fresh.