The Prosocial Portfolio, one of the portfolios that was part of The Motley Fool's Real-Money Stock Picks program, is drawing to a close. This article is one of a series providing updated thinking on stocks I purchased for the Prosocial Portfolio that The Motley Fool will now hold for the super long haul.
For most of the food- and beverage-related stocks in the now-closed Prosocial Portfolio, the last four and a half years have constituted good times in terms of their returns. Given the focus on organic, natural, "healthy," and sustainable merchandise in their offerings, they all have some focus on stakeholder elements beyond the short-term bottom line.
One of the major trends has been that an increasing numbers of consumers have been demanding healthier, more sustainable, and "responsible" alternatives. Much of this trend has been attributed to Millennials and their increased economic influence.
The good news is that the sector has exploded, so we could say these companies are ahead of the curve in addressing the trends or, in some cases, even pioneered them by creating or expanding the market. At the same time, if their managements don't stay nimble, these companies could become victims of their own success as competitors try to steal market share in these areas.
Something else to watch with many of these stocks is backlash against some elements of the natural and organic movement. Increasing numbers of people are putting a spotlight on areas like anti-GMO sentiment and gluten phobia, accusing those who choose to avoid products that include them of being "anti-science."
We could argue until the free-range cows come home about whether or not skittish consumers are responding in a reasonable way to GMOs, gluten, artificial ingredients, and other elements of what's on our plates. Regardless of where you stand on those issues, it's an area to watch in terms of the way many of these companies' products are viewed.
A whole lot of challenges for Whole Foods
First of all, success breeds competition. In many parts of life, imitation is a form of flattery, but in business, it can erode financial strength. The developments that have been taking place in the organic and natural market give us a prime example.
For many years, Whole Foods Market (NASDAQ: WFM) beat away challenges as more and more retailers began offering organic or gourmet products. It's dealt with increasing numbers of companies like Trader Joe's and Wal-Mart (NYSE:WMT) treading into its space.
In the last several years, though, competition has stepped up on many fronts. It's not just about companies like Costco (NASDAQ:COST), Kroger (NYSE:KR), Target (NYSE:TGT), and a variety of other long-standing retailers with big footprints stepping up their organic and natural offerings, but also the growing number of stores focused on fresh, natural, and organic foods, such as Sprouts Farmers Market (NASDAQ:SFM) and The Fresh Market (NASDAQ:TFM).
Being able to get in the "winners circle," and stay there, is of course the rub in this competitive landscape.
Right at this moment, Whole Foods has more to worry about than increasing competitive pressure. The organic grocer recently suffered a ding due to a high-profile revelation that some of its New York City stores had overcharged customers (although management points out that this was inadvertent human error, and at times, the pricing mistakes were in customers' favor).
In its most recent quarter, Whole Foods management revealed that the nationwide news headlines about the overcharging controversy has hurt sales. Although co-CEOs Walter Robb and John Mackey released a video apology and outlined the ways the company is working to rectify the situation and regain customers' trust, it's an element we investors will have to watch going forward. The situation probably hasn't helped Whole Foods' continued battle to put to rest the "Whole Paycheck" image for once and for all.
On the more positive side, though, I'm looking forward to the launch of its new 365 by Whole Foods Market concept, which should be attractive to many consumers, including the coveted millennial demographic. Management has tantalized us with the promise that it will be different than anything else in the marketplace, and that opening these stores will be in addition to 1,200 stores Whole Foods believes it can open over the long haul.
I continue to feel that Whole Foods Market is an innovative, stakeholder-friendly company with a great, visionary management team. I believe those who are calling for the demise of Whole Foods' growth are in the grips of way too much pessimism. After all, it remains a profitable and basically financially strong company. Not only is it a hold, I'm of the opinion that the recent price weakness yields a buying opportunity.
Chipotle (NYSE:CMG) has been a champ in an industry that's notoriously difficult to navigate. It has continued to deliver stellar growth in sales, same-store sales, and bottom-line profit. In the last 12 months alone, Chipotle's revenue has grown 23%, and it has generated 12% growth in net income.
The figures are particularly impressive given some quick-serve turmoil in light of a changing marketplace; one of the most-cited examples is McDonald's (NYSE:MCD), which has been providing lackluster growth and struggling to re-envision its brand for a new kind of consumer.
The burrito slinger continues to hold strong to its Food with Integrity mission, whether related to its temporary removal of carnitas from stores due to a pork supplier who violated its animal welfare rules, stripping genetically modified organisms (GMOs) from its menu, or its recently announced efforts to devise a whole-wheat tortilla with super-simple ingredients.
In addition, Chipotle also recently made a smart move by expanding employee benefits previously available only to salaried employees to include hourly and entry-level workers, who will begin to have sick leave, paid vacation, and college tuition reimbursement.
Chipotle's stock price weakness looked like a screaming bargain several months ago, but its share price has since recovered -- that's bad news for investors looking for a great deal. While it's still a solid hold, it's not as compelling of a buy right now. Regardless, some investors may want to take a small bite and hold off on a bigger helping until another point of weakness.
Coffee and prosociability
Starbucks (NASDAQ:SBUX) turned out to be one of the best performers in the Prosocial Portfolio. The coffee giant has been willing to evolve with the times and try new things. Some of those ideas haven't worked out quite as hoped, like its decision to discontinue the stand-alone stores dedicated to Evolution Fresh juice and LaBoulange baked goods.
Still, there's been far more good than bad about Starbucks' performance over the years. In an example of its willingness to evolve, Howard Schultz's efforts in his "flywheel" strategy have worked out very well as Starbucks has captured a heck of a lot of mobile and digital business.
For example, Starbucks processes more than 7 million mobile transactions every week -- the equivalent of 16% of all transactions in its cafes. Last holiday season, a staggering one in seven Americans received a Starbucks gift card, and those feed into its loyalty programs, which Schultz has called "a critical driver" of the company's business. Speaking of driving, Starbucks has also been coming up with interesting business partnerships to help build loyalty, such as its recent deal with Lyft.
On other stakeholder fronts, Starbucks continues to be a cut above the rest, going beyond its long-standing and very well-known policy of treating its employees well. Despite the backlash against the arguably ham-handed Race Together campaign, it's obvious Schultz had his heart in the right place. Refusing to be a silent bystander concerning major issues in America, he is driving Starbucks to be a force for good. The incident also sparked a lot of discussion about businesses' responsibilities in the world around them.
As has historically been the case with the coffee giant, Starbucks' shares hardly look cheap at the moment, trading at 31 times forward earnings, but the stock continues to be a solid portfolio holding for its shareholders -- and we shouldn't underestimate Starbucks' ability to surprise by exceeding expectations.
Panera (NASDAQ:PNRA.DL) has some socially responsible credit, which helped it into the Prosocial Portfolio. CEO Ron Shaich has long held food insecurity in America as an issue the business can address in different ways. Take its Day-End Dough-Nation program, through which Panera donates baked goods to hunger relief agencies at the end of each day, and the four Panera Cares non-profit cafes it currently operates in Boston; Dearborn, Mich.; Clayton, Mo.; and Portland, Ore. These cafes offer a "pay-what-you-can" model, through which visitors can pay "suggested donation" amounts for food, pay more to help support the cafe, or pay less if that's what they can manage.
Panera has also been among the vanguard by recently announcing its "No No" list as it "cleans" its menu of artificial preservatives, colorings, sweeteners, or flavors, furthering its previous work in offering higher-quality fast-casual food and keying into the growing exclusionary diet trends many consumers are adopting.
I also like that Panera has a welcoming atmosphere, often proving itself to be a place with a stealthy advantage: social interaction. It's well-known as a place where people informally gather to engage in activities like book clubs. There's something to be said for offering customers a casual social gathering place where no one has to play host or hostess, cook, or clean up.
Despite good works, trendsetting, and social elements, Panera's financials have been sluggish. Last year, revenue growth sharply decreased to 6% from 12% growth the year before, and net income growth has also decelerated sharply.
The company has been in the midst of enhancements it calls Panera 2.0, which are technological changes to reduce "customer friction" in its cafes and improve operational processes, among other goals. It has also been delving into areas like delivery and catering.
Just last week, Panera reported heartening signs about its third-quarter sales to date, which investors cheered after tidings of a lackluster second quarter that missed analysts' expectations. However, it still has a lot to prove.
Of all four Prosocial Portfolio stocks in this article, I'm least jazzed about Panera, but given my long-term buy-and-hold philosophy and my belief that some of its strategies could reignite growth, I chose to ask The Motley Fool to hold it with the rest.
There will be a second course
Although these companies face varying degrees of challenges in the competitive landscape, I still feel they can be solid winners for the Fool's super long-haul "coffee can" as the Prosocial Portfolio draws to a close.
Next time, I'll take a look at some other food stocks that made their way into the Prosocial Portfolio: Hain Celestial, WhiteWave Foods, and PepsiCo. As consumer tastes evolve, there's a great deal of opportunity -- and challenges -- for investors to chew on regarding these stocks, all of which were solid performers in the portfolio over time.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Alyce Lomax owns shares of Chipotle Mexican Grill, Costco Wholesale, Starbucks, and Whole Foods Market. The Motley Fool recommends Chipotle Mexican Grill, Costco Wholesale, Hain Celestial, Panera Bread, PepsiCo, Starbucks, WhiteWave Foods, and Whole Foods Market. The Motley Fool owns shares of Chipotle Mexican Grill, Costco Wholesale, Hain Celestial, Panera Bread, PepsiCo, Starbucks, Whole Foods Market, and WhiteWave. 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.