Whole Foods Market (Nasdaq: WFMI) was trading at $60.15 as of Oct. 27.

It's Halloween -- so you're in the mood for something scary, right? Well, how about (I shudder at the mere thought of it) food covered in pesticides! You want more? Fertilizers made out of sewage sludge! Bioengineered foods! Ionizing radiation of foods! It's enough to give you the shivers, isn't it?

Truth be told, there isn't complete consensus that all of the above things are purely terrible. But plenty of people have come 'round to the belief that they'd rather eat (and feed their families) more "organic" food.

If you're interested in profiting from this trend toward healthier eating, look no further than Whole Foods Market. Fool co-founder Tom Gardner liked what he saw so much that he recommended the stock last summer in Motley Fool Stock Advisor. He later sold it, after earning about 40% on it. Good call.

The case for
Sure, organic food is really gaining in popularity. Witness these recent developments:

  • The organic food business in the U.S. is expected to total $13 billion in 2003, up nearly 20% from $11 billion in 2002. In 2005, it's expected to total $20 billion.

  • Farmers in China are keen on growing organic foods to meet global demand.

  • The U.S. Department of Agriculture created a National Organic Program last year, to create a national standard for "organic" certification.

  • More than 10% of Americans are eating organic foods, while more than half of us have tried them at one point.

  • Organic foods have become easier to find, even appearing at convenience stores.

Revenues have roughly doubled in the past five years for Whole Foods, totaling $2.7 billion in 2002. Net income, at $84 million, has nearly doubled, as well. The company's net profit margin has generally increased from about 2% nearly 10 years ago to about 3% today. That's solid growth and a decent margin for a food retailer.

And here's how Whole Foods compares to the grocery industry as well as the overall stock market (numbers courtesy of Hoovers.com):

    WFMI  Industry  Market 
Return on Equity        13.6%     --      5.4%   
Return on Assets         8.9%   (2.2%)    0.9%   
Ret on Invested Capital 11.2%   (3.5%)    2.6%   
Price/Cash Flow         17.67    6.56    13.48   
Inventory Turnover       16.4    8.1       7.7   
Total Debt/Equity        0.22    1.62     1.44   
12-Month Revenue Growth 15.5%   (6.2%)    8.4%   
12-Month Income Growth  41.7%     --     11.5%   
12-Month EPS Growth     39.2%     --      3.8%

These figures reveal a strong and growing company -- one able to sell out its inventory quickly and keep debt under control, reinvesting capital more efficiently than most companies.

The case against
But there's panic in the organic! One concern is the risk that the organic food craze might turn out to be something of a fad. Or maybe it will just level off soon, with fewer new gobblers joining the movement. This is possible, since there is a significant drawback to many organic foods: price.

As an example, Campbell Soup(NYSE: CPB)recently announced the launch of its new organic tomato juice -- priced 35% higher than its regular tomato juice. This is a big deal because most of the nation's big food companies, such as Kraft(NYSE: KFT), Heinz(NYSE: HNZ), and General Mills(NYSE: GIS), have not made sizable forays into the organic arena. If Campbell succeeds, more are likely to follow. Not only will an increase in supply probably cause prices to decrease, but what niche will a Whole Foods or a Wild Oats(Nasdaq: OATS) feed if brand-name organic foods make it to your local non-organic market?

Perhaps the main drawback to this stock is its current price, featuring a price-to-earnings ratio in the neighborhood of 35. In the past five years, its P/E has ranged from 16 to 43, so it's currently near the high end of that spectrum.

In sum
I'm not inclined to buy the stock at these prices. Still, I am interested in the company, and at a significantly lower price (perhaps as much as 30% to 50% lower), I'd love to snap up some shares.

What do you think? Share your thoughts (or just read those of others) on our Whole Foods discussion board -- we're offering a free trial of our discussion boards, so you have little to lose.

Selena Maranjian has bought organic milk at a Whole Foods Market, but she doesn't own the stock. For more about Selena, view her bio and her profile.

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