Last week was not a pleasant time to be a Whole Foods Market (WFM) shareholder.

On Wednesday, Whole Foods reported fiscal second-quarter earnings that missed analyst estimates on both sales and earnings. Compounding the disaster, Whole Foods management cut guidance for the full fiscal year. In response, investors did some cutting of their own -- lopping 19% off Whole Foods' market cap.

By the time the selling was over, Whole Foods shares were $9 cheaper than they had been prior to the earnings release. $3.3 billion worth of market cap, gone in a flash. And yet, for one bright analyst up on Wall Street, that just meant Whole Foods had become $3.3 billion cheaper to own.

Meet the analyst who upgraded Whole Foods
At last report, at least five separate analysts -- BMO Capital, Deutsche Bank, Sterne Agee, Piper Jaffray, and Jefferies & Co. -- were sufficiently spooked by Whole Foods' report to withdraw their buy recommendations. One analyst, Cantor Fitzgerald, went a step further and cut Whole Foods to "sell." But going against the grain, an analyst at Argus Research voiced another take on the quarter entirely -- and urged investors to buy shares of Whole Foods.

This contrarian suggestion quickly caught the eye of reporters at, who quoted the Argus analyst, Chris Graja, at length in a column on Thursday. A few excerpts:

  • "Despite management's initiatives to lower prices, we believe that a 12% growth rate remains achievable and an attractive driver of valuation."
  • "We expect comparable-store sales to grow ... We also expect WFM to gain market share. While more retailers are offering natural foods, the core shoppers are quality conscious. WFM has demonstrated its expertise in sourcing, presenting, and profitably selling high quality prepared foods, meats, cheese and produce."
  • "We expect gross margin to decline slightly, offset by improvements in the expense rate."

Logic check
So far, so good. While admitting the potential for lower gross profit, Argus is hoping that lower operating costs will offset that, and is still sticking with its original thesis that Whole Foods Market will grow earnings at about 12% annually.

I can't say I buy the idea that 12% growth is an attractive rate for a stock selling for 26 times earnings, and 36 times free cash flow, however. And the analyst's contention that Whole Foods should be bought because it has "excellent merchandising and a product offering that can not be easily offered on the Internet." That doesn't sound quite right.

We already know, for example, that organic foods are being "easily offered on the Internet" -- by grocery delivery services Peapod, by's new AmazonFresh service, by Harris Teeter, and even by Wal-Mart.

For a number of reasons, from convenience to saving money on gas to saving the planet, high-end shoppers are increasingly turning to Internet grocery services, and these may pose more of a threat to Whole Foods' business than Argus Research realizes. (Curiously, Whole Foods itself appears to recognize this threat, even if Argus' analyst does not. According to The Wall Street Journal, one of the things Whole Foods is looking at as a way to boost profit margins is offering an order-over-the-Internet grocery delivery service of its own).

And one more thing...
So far, we've covered why Argus' valuation argument doesn't seem to work -- even if the analyst is right in projecting 12% long-term profits growth. We've poked a hole in the argument that Whole Foods is somehow a unique brick-and-mortar retailer, and immune from Internet e-tail competition. But there's one final reason to look askance at Argus' recommendation to buy Whole Foods when everyone else is downgrading the stock: the analyst's record.

I recently came across a new service called TipRanks, which mines historical data on individual analyst recommendations, aiming to enable investors to "instantly see the track record and measured performance of any analyst you come across online, so you know who to trust!" As it turns out, TipRanks is familiar with Argus analyst Chris Graja's record --- and what it has to say on this score is not encouraging.

Over the course of 16 measured recommendations that Graja has made over the past two years, TipRanks notes that only 8 of the 16 -- 50% -- of the analyst's picks have successfully outperformed the S&P 500. Plus, the average return per recommendation for investors who've followed Graja's advice has been negative 4.5% across these multiple recommendations (in the year following any given recommendation). (Note: These numbers will vary slightly from day to day, as stock prices fluctuate.)

Result: TipRanks' proprietary formula for ranking investment analysts has Graja pegged at less than a one-star rating (out of five possible) -- a score that places him at No. 2,774 out of a field of 3,067 analysts ranked.

Long story short: If Graja is the only analyst out there who thinks Whole Foods' 19% drop in share price last week was good news... there may be a reason for that.