How I Missed a 3-Bagger

Ordinarily, I'm the biggest fan of socially responsible companies. I generally prefer to invest in organizations that are trying to make the world a better place, and my time horizon tends to be very long term. This time, however, was different.

In July 2009, shares of Whole Foods (Nasdaq: WFM) had been hit very hard in the previous 12 months, losing nearly 20% of their value. Here was a great, socially responsible company trading at a significant discount. Surely the time was right to pick up some shares. And yet...

Conscious what?
Our economy was in rough shape, with unemployment having soared to 9.5%. And I was very skeptical, in the midst of the Great Recession, of investing in a company that was nicknamed "Whole Paycheck." Anecdotally, I had cut back on my own shopping at Whole Foods, and I'm a bit of a spendthrift. What would more prudent people do?

Before investing in Whole Foods, I needed to know that it had a plan for dealing with the tough economy and the perception that their prices were too high. Fortunately for me, Whole Foods CEO John Mackey was visiting the Fool in July 2009. I just knew that he'd be able to address my concerns about the company.

I was wrong. Instead of talking about declining comps and flat sales, he spent his entire time telling us about "conscious capitalism." Conscious what? Our economy had just fallen off a cliff and he wanted to get all touchy-feely on us? Needless to say, I was very concerned.

Shortly after Mackey's talk, my colleague Alyce Lomax wrote an excellent summary of it for Fool.com. In a nutshell, conscious capitalism is a type of economic activity that is about more than just making money. Rather, consciously capitalist enterprises are about big ideas that soar far above narrow self-interest. These enterprises are run on behalf of all stakeholders, not just investors.

Betting against conscious capitalism
Mackey pointed to several examples of these types of companies. Microsoft (Nasdaq: MSFT) was one such enterprise that he singled out as being built around the exciting idea of a personal-computing revolution. He also highlighted Southwest Airlines (NYSE: LUV) and Nordstrom (NYSE: JWN) for their commitment to outstanding customer service. Finally, he praised Google and Genentech for their dedication to discovery and the pursuit of truth.

I found myself admiring Mackey's idealism and truly appreciating his more noble view of business, especially after the breakdown in values that resulted in the financial crisis. But was this the sort of thinking that would allow Whole Foods to overcome its grave challenges in the summer of 2009? I was certain it wasn't. So certain, in fact, that I predicted Whole Foods would underperform on Motley Fool CAPS.

Now, more than two years later, I can say that I was wrong. Really wrong. On this particular recommendation, you can score it as a victory for idealism over narrow utilitarianism. Go, idealism!

I picked Whole Foods to underperform on July 15, 2009, when it was trading at $21.05 per share. It is now trading at $67.91 per share. Had I bought shares on that day back in 2009, I'd be sitting on a gain of 222%, which is a three-bagger in Peter Lynch's parlance.

But I didn't buy shares that day, and I totally missed an impressive comeback. For the first quarter of fiscal 2010, Whole Foods reported that net income was up 71%, and that sales were up 7%. Alyce Lomax reported at the time that fierce competition from Kroger (NYSE: KR) and Safeway (NYSE: SWY) "didn't put a dent in Whole Foods' recovery." In the following quarter, Mackey reported that "our second quarter results are the best we have reported in several years." The company's efforts to provide cheaper items were beginning to pay off with many customers. And others were willing to start paying up for quality again. Who would have guessed it?

How I was wrong -- let me count the ways
Actually, lots of folks would have guessed it. So what did I learn from my unwise, bearish call on Whole Foods? Here are three lessons:

1. I had just assumed that the severe downturn would continue and that shoppers would abandon higher-end grocers. Clearly, this was a failure of imagination on my part. Fool co-founder David Gardner often teaches us to consider multiple futures for any potential investment idea. For me, I was locked in on just one future, and it wasn't a rosy one.
2. Just because John Mackey wanted to talk about "conscious capitalism" didn't mean that he wasn't focused on the details of the business. This one is so obvious that I'm embarrassed to admit it in a public forum. I just assumed he didn't have his eye on the ball. I assumed wrong.
3. Finally -- and perhaps most important -- great companies find a way to overcome difficult environments. Whole Foods is clearly an outstanding company that is head and shoulders above its competition, in my opinion. It's not smart betting against such companies. Starbucks (Nasdaq: SBUX) is a perfect example of another excellent company that rebounded spectacularly after having been hit hard by the Great Recession.

Winston Churchill once said of an opponent that he was a modest man who had much to be modest about. Investing will make all of us feel very modest at times. It's very important to remember that every once in a while.

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