In a market that sits near all-time highs, it's not always easy to find new investments. However, if you dig deep enough, you can find industry leaders that have lagged the market -- and Whole Foods Market (NASDAQ: WFM) is one of those companies. The grocery industry titan has pulled back nearly 20% from its 52-week high, so let's find out why it has declined so drastically during this bull market and if this is our chance to buy.
The health food giant
Whole Foods is the leading retailer of natural and organic foods in the United States. It was the first national "Certified Organic" grocer, and it has become the face of America's transition to healthier eating. The company currently operates 367 locations in the United States, Canada, and the United Kingdom.
The start of the weakness
2013 was lining up to be a great year for Whole Foods, as its stock had risen 41.44% through Nov. 6, but then came the fourth-quarter earnings report after the market closed that day; this is where the trouble began. Here is an overview of the results:
|Earnings per share||$0.32||$0.31|
|Revenue||$2.98 billion||$3.04 billion|
Earnings per share increased 6.7% and revenue rose 2.2% from the fourth quarter of 2012, driven by comparable-store sales growth of 5.9%. However, this is a clouded comparison, as Q4 2012 contained an extra week; on a 12-week comparative basis, earnings per share rose 16% and revenue rose 11% year over year. These results, paired with the previous three quarters, made for the best year in Whole Foods' 35-year history.
Had this been all that was reported, the stock likely would have headed higher, even while the company posted mixed results in comparison with analyst estimates; however, the company then cut its fiscal 2014 outlook. Here is the updated guidance versus the previous guidance:
|Metric||Updated Guidance||Previous Guidance|
|Earnings per share||$1.65-$1.69||$1.69-$1.72|
|Comparable-store sales growth||5%-6.5%||6%-7.5%|
The change is not that drastic and it would result in another record year for the company, but negativity set in anyway. With good key metrics and a minimal reduction in outlook, I believe the stock should have remained unchanged or possibly fallen a point or two in the next day's trading; however, this was not the cas,e as the stock was hit hard.
The decline that ensued
After the release of the report, Whole Foods' stock declined about 8% after-hours and it proceeded to fall 11.18% in the trading day that followed. It now sits more than 18.4% below the level it was at before the report, which is about 19.8% below its 52-week high of $65.59.
Whole Foods is not the only natural grocer on the decline. The Fresh Market (NASDAQ:TFM) and Sprouts Farmers Market (NASDAQ:SFM) have both pulled back significantly as well. The Fresh Market currently operates 149 stores and Sprouts operates 165, and both are expanding quickly right alongside Whole Foods. Take a look at how each company performed over several recent time frames:
|Metric||Whole Foods||Fresh Market||Sprouts|
|Performance Nov. 6, 2013-Jan. 10, 2014||(18.47%)||(24.46%)||(20.19%)|
|Performance Dec. 31, 2013-Jan. 10, 2014||(9.11%)||(4.15%)||(0.23%)|
|% below 52-week high||19.87%||32.09%||22.47%|
The Fresh Market has had a very rough time after missing on several earnings reports, including a miss on both the top and bottom lines last time out; earnings per share came in at $0.23 on revenue of $364.50 million versus analyst estimates of $0.26 per share on revenue of $378.57 million. The company then cut its outlook, causing the stock to drop 14% in its next trading day. I do not believe The Fresh Market should be touched in today's market, because there is too much negativity surrounding the stock and there are much better options in this industry.
Sprouts Farmers Market went public on Aug. 1 and it turned out to be one of the hottest IPOs of the year; it priced its shares at $18, but they surged more than 122% to $40.11 in their first day of trading. In its first earnings report, Sprouts blew away earnings estimates; it reported earnings per share of $0.13 on revenue of $633.60 million versus analyst estimates for earnings of $0.10 per share on revenue of $620.16 million. However, its shares fell more than 1% in the trading day and the decline continued after company insiders announced the sale of more than 17 million shares. Sprouts now sits more than 17.5% below the level it was at before the earnings report, but I believe the negativity is priced in and that it is the second-best investment option in the industry behind Whole Foods.
Should we buy?
Yes, I believe the sell-off in Whole Foods' stock is a buying opportunity. The mixed earnings report and outlook reduction should have caused little to no decline, so the 18.4% sell-off is far from warranted. I believe Whole Foods will continue its expansion efforts and deliver on earnings in 2014, driving its shares back toward their 52-week high. If this happens, investors would accumulate a solid return of roughly 25%, which I believe will far outperform the overall market in 2014.
The Foolish bottom line
I believe Whole Foods is one of the best investment options in the market today. It is the "best of breed" company in its industry and I believe it will continue to be the leader in the natural and organic grocery space for decades. It is nearly 20% below its 52-week high, so investors should strongly consider adding it to their portfolio before it starts its march higher.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Joseph Solitro owns shares of Whole Foods Market. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.