How Low Can This Stock Go?

These days, there's no shortage of stocks that make you wonder, "How low can this stock go?" That's a good question, because it seems that no matter how far some stocks fall, they end up falling even further. With that in mind, let's look this week at the once high-flying Whole Foods Market (NASDAQ:WFMI).

Unlike my last contender for the "How Low Can This Stock Go" feature, I've been high on Whole Foods for years. Other investors have found the stock completely unappetizing for quite a while now, but it's those stocks that often make the best long-term purchases. Let's take a close look at this one.

Natural-born enemies
Whole Foods Market peddles mostly natural and organic wares, with a good dose of gourmet items mixed in. Of course, that description might give you pause, if you have any sense of what the competitive landscape looks like these days.

For one thing, privately held grocer Trader Joe's offers an eclectic mix of wares, often organic, on the cheap. (Its "Two-Buck Chuck" made cheap wine seem hip.) Meanwhile, many grocers have gotten into the act of peddling organic goods and stepping up their gourmet merchandise -- Wal-Mart (NYSE:WMT), Safeway (NYSE:SWY), and Kroger (NYSE:KR) all offer plenty of organic goods now.

And then there are the regional supermarkets that make formidable rivals. Mom-and-pop organic grocers, farmers' markets, co-ops, and the like can hardly be disregarded, either.

Add in the current tough economy and Whole Foods' derisive nickname, "Whole Paycheck," and the bearishness builds.

Comparison shopping
Whole Foods not only faces daunting competition and nasty economic headwinds, but it's also still digesting its acquisition of Wild Oats Market, a former rival in the organic-supermarket space. That makes for a double whammy against Whole Foods in the current environment.

So far, the Wild Oats deal has seemed like more of a drag on profitability than anything else. Whole Foods' most recent quarterly results included a discontinued dividend, a slowdown in store growth and spending, and a quarterly profit that -- gasp! -- decreased on a year-over-year basis.

On the other hand, Whole Foods' revenue and same-store-sales data still seemed pretty impressive considering the economic tribulations. The figures increased by 21.5% and 2.6%, respectively.

Let's compare some metrics for a few grocers.

Data from Yahoo! Finance as of 8/14/08.

Whole Foods and Safeway look the most compelling, given their expected five-year growth and multiples. It's also worth noting that Whole Foods' trailing 12 months have been uncharacteristically rough ones that have dragged down its compound annual growth rate, which has historically been high. For the 12 months ended September 2007, the end of its most recently completed fiscal year, its five-year CAGR in net income was a far more fattening 17.5%.

With 272 stores now open, Whole Foods also has a lot of room for growth -- unless you believe the concept is of a limited appeal, as I'm sure many bearish investors do. But for comparison's sake, as of January, Wal-Mart had 3,550 stores in the U.S. alone, not even counting its Sam's Club stores. Safeway has nearly 1,800, and Kroger operates nearly 2,500.

Whole mission makes a difference
Yet in some ways, comparing Whole Foods to conventional grocers strikes me as similar to comparing Amazon.com (NASDAQ:AMZN) to Barnes & Noble (NYSE:BKS) or Borders (NYSE:BGP). There are some cosmetic similarities, but a history of innovation differentiates them.

Whole Foods is quite different in its authentic philosophy. It spearheaded green initiatives such as promoting wind power and ditching plastic bags, and it has championed local produce, labeling, food ethics, and employee-friendly touches such as capping executives' pay at 19 times workers' average annual wage.

Furthermore, Brandweek recently revealed that Whole Foods is the No. 1 "green brand" with Generation Y. That's not a generation to underestimate, either -- it's a sizable group. They aren't called the Echo Boomers for nothing.

That brings me to another major part of my bullish thesis; Whole Foods' brand doesn't seem broken in the least.  

Half-price at Whole Foods -- can you believe it?
The short term may be rough. So far, the Wild Oats acquisition has looked like the equivalent of a bad case of indigestion, and those of us who are waiting for signs that it will pay off in the long term continue to be frustrated by the Federal Trade Commission's continued contention that the merger carried antitrust ramifications. Meanwhile, the "Rahodeb incident" was quite something to behold, and I recently had to admit that Whole Foods' ground-beef recall gave me a shudder.

Whole Foods' stock has been hacked down by about a half in the past year. And I think that makes for a nearly ridiculous super-sale. For those with a long-term horizon, you're paying 18 times earnings for a high-quality, innovative retailer that not only has tremendous room for growth but also seems to be perceived as needing a "turnaround" even though it doesn't have a broken brand. That seems like a crazy good deal to me.