Whole Foods still belongs in your portfolio

Shares have plunged on expectations of a slowdown. But these guys are the best of the best.

By Jim Cramer Nov 7, 2013 10:33AM

Customers shop in the produce section at the Whole Foods grocery story in Ann Arbor, Michigan © REBECCA COOK/Newscom/RTRIf it weren't for Twitter's (TWTR) initial public offering, this day would be so different. TheTheStreet.com logo entire focus would have been on two growth stocks that everyone had loved coming in -- Whole Foods (WFM) and Qualcomm (QCOM) -- even as I think only one of them deserves that adoration.

 

We focus on these two because Whole Foods is among the fastest-growing of the senior growth stocks in retailing, and Qualcomm is pretty much the same for semiconductors.

 

Both have spoiled us in the last few years: Qualcomm has put in pretty consistent 30 percent revenue growth, and Whole Foods has been delivering same-store sales growth of 5.9 to 7 percent. Both are at top of game for their respective groups, and both stocks are true core holdings in the business.

 

That's why it was so jarring to hear both of them lower their growth rates.

 

Now, that said, I have not been a fan of Qualcomm. That's because, while it has given you high growth as phone companies have transitioned from 3G to 4G and as China has rolled out better coverage, I actually find the firm maddeningly inconsistent. When Qualcomm meets with analysts two weeks from now, it would be perfectly within the company's ways to raise the growth rate back because of new orders, or because of lessened concentration at the top tier of customers vs. what management had previously thought -- which was the principal reason for the guide-down.

 

There is a reason a company with 30 percent revenue growth has only seen its shares rise 12 percent this year: I am obviously not alone in thinking that Qualcomm just produces too many surprises in its quarter-to-quarter roadmap. While it has returned capital to shareholders in the form of share buybacks and dividends to the tune of $6.7 billion, the actual share count has been pretty much consistent these last three years, and the 2 percent yield does us no favors. It won't be a floor.

 

So I'm left here thinking, "Great company -- but why can't these guys guide better?" Someone is always looking to start a position in this name, and I am sure today will be no different, because management did hold out hope for a second-half turn. But at some point this one may turn into a company such as Broadcom (BRCM), the benchmark of weak semis, and I simply don't trust it.

 

Whole Foods, on the other hand, has consistently earned our trust. That is why the stock has risen 41 percent coming into Thursday's session. Now, I had feared the reaction to this quarter, and I had told people not to buy it, but I was disappointed -- as we are all meant to be -- by the guidance of a slowdown, even if it seems puny by most companies' standards.

 

But Whole Foods is not just another company. It is, as co-CEO Walter Robb said on the call, "a no-excuse company." So there was just a sense that the bar was too high for the quarter, given the firm's aggressive expansion.

 

Whole Foods gave out a huge amount of fodder to the bears as co-CEO John Mackey cited the new three Cs of growth stock oblivion: "cannibalization, competition and currency." Nonetheless, the latter one seems a bit hollow, given that the store distribution. Out of $11.6 billion in total sales in fiscal year 2012, only $374 million came from the U.K. and Canada, the overseas markets of Whole Foods.

 

Now, I suspect some of this is temporary. Mackey explained, for example, that the cannibalization in Boston, where the company is expanding aggressively, should be muted a year from now. He also said the stores will be producing gangbuster numbers. But the competition line sent visions of bears dancing in the aisles, as the big rap against Whole Foods is the well-financed litany of Sprouts (SFM), Fairway (FWM), Fresh Market (TFM) and the implacably private Trader Joe's.

 

I think this plethora of me-toos that have come into the market, as well as the sophistication that a firm like Kroger (KR) now brings to the party, is going to put Whole Foods in the penalty box for some time. That's a shame. These guys are the best of the best, and the theme of the chain -- healthy eating -- is only accelerating. But when the bar is too high, the lowering process is about time and price, meaning the stock's got to go lower and stay lower for a couple of quarters. All that said, when half of the gain from the last quarter is repealed, Whole Foods will be de-risked once again and the opportunity will beckon.

 

So there you are -- two terrific growth companies, one worth keeping and the other worth exiting. But, at least today, the exiters will dominate the shares of both companies.


Jim Cramer's headshot

    


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123Comments
Nov 7, 2013 11:20AM
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Depending on the time of year, almost half of the "organic" products you see in grocery stores come from overseas.  And there's no real way of knowing if these products are actually organic.  Don't tell me that some enterprising people from China or South America haven't figured out they can grow and manufacture stuff as cheaply as possible and triple their profit margin by slapping an "organic" label on the product.

If you really want organic products, buy local.

As far as Whole Foods goes, we shop there about twice a year, when we are looking for some specialty cheese or seafood that we can't find anywhere else.  I don't understand the people that do all their grocery shopping at Whole Foods - why pay 50% more for the same stuff you can get from a regional grocery store?  The pistachios you buy at Costco or Wal-Mart come from the same farm as the ones sold at Whole Foods.   Why pay a premium when you don't have to?

Nov 7, 2013 1:47PM
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Wow twit pulled the folks in. I still think this is stupidity at its finest. Tulip bulbs anyone. One of these will signal the end believe me.  Euphoria like this only goes on for a short time.
Nov 7, 2013 1:39PM
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OK.......... I will say something about Twitter. If you were not old enough to lose money in the DOT COM bust beware of business models with questionable revenue stream.......... JMHO
Nov 7, 2013 2:26PM
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We had a few up days in the market so we were due for a down one, we all know that's how it goes.
CGT
Selling a stock for a higher price then you bought it is not manipulation or scumbaggery, actually that's the entire point of stocks.
Nov 7, 2013 2:43PM
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What is going on with the stock market today??? There something strange in this economy right now. The stock market should be up. I'm baling out.
Nov 7, 2013 1:42PM
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Wouldn't a "black pudding trail" be kind of messy..???
Nov 7, 2013 4:40PM
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I see you boys are still abusing each other. 
Nov 7, 2013 4:00PM
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I've been a happy whole foods owner for 2 years, but if Cramer is recommending it that means it's time to dump it.
Nov 7, 2013 10:58AM
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I like today's article Jim.  Just try and make sense out of the Guberment numbers today.  The unemployment report was incongruous at best and the GPD numbers were basically disavowed.  Is it me or are others beginning to get a sense of losing control and direction?  We used to have information that we could have a reasonable expectation was close to being on spot.  The old song about slipping into darkness comes to mind.  We are supposed to buy into a positive sentiment gleaned from the ECB lowering interest rates because they see demand slipping? Hmm at what point will Central Bankers stand back and let markets be markets.  All this juice and sentiment control always ends in economic disaster but they continue to plod along seemingly oblivious to any warning signs.  They are people and I think sometimes they just go for the notoriety and power and not really a commitment to the folks and principles they sell themselves as representing.  My opinion is the late May or early June shock we saw when it was suggested tapering was in the offing was the injection of the little hole near the bottom of the barrel that has seen sentiment moving towards neutral.  Like a syringe in your arm that little drip drip seems infinitely small but over time that drip drip amounts to a lot.  My conclusion is we are seeing a slow but steady erosion of sentiment that goes up one step but then down one and a half.  JMHO
Nov 7, 2013 12:56PM
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When I'm on vacation I avoid blogging on the computer - Thumbs Up

When I'm on vacation I spend a lot of time blogging on the computer - Thumbs Down

Nov 7, 2013 4:12PM
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To the To Big To Fail / To Big To Jail     DIE BANK OF AMERICA DIE !!
Nov 7, 2013 11:34AM
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My opine on twit. Short it at 28.50
Nov 7, 2013 1:39PM
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Yes that's what it was....Trader Joe's and Aldi's had the "Connection"...

I'm old, get my stores mixed up...

 

Twitter at $45.10 and now more...I find that interesting, guess it was/is a "moonshot" for awhile.??

 

VV...Doubt they will get season passes for Niners, they had them 1 year.

His Dad belongs to Investment or Bicycle club...They have a block of 10-20.?

So Sis and hubby, go to some using his seats...They are bigger into baseball, have a Condo in Scottsdale down the street from Spring Training area...It's kind of family shared, but we never go out for a few weeks in the winter..

Other friends and cousins in SF area, one old schoolmate, is "die hard fan"...Season tickets and he would drive within 500 miles to watch them play. 

Nov 7, 2013 12:49PM
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The market is twitterfied.......... should be renamed Rob Ford Exchange.
Nov 7, 2013 12:47PM
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Something odd about another article on here, the worst performing DOW stocks of the year, it had no comments section so I'll make it here.
McDonald's was on there, the stock including dividends has given you an 11.5% (roughly) return this year and this is a poor performer?  There was a second stock on there that had a similar 11% or so (forget the name) return as well, people's expectations are kind of BS at this point. 
Nov 7, 2013 6:26PM
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Btw Irish economy pointer ...a young Irish lass told me that Twitter has a decent size facility in Dublin and is hiring 200 employees plus Facebook also has a pretty good sized operation ...she said lots of US companies are setting up their HQs in Eire for tax benefits and language and also its way cheaper than setting up in London.

Very Interesting but a great underpinning for a Celtic comeback. 
Nov 7, 2013 2:34PM
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Twit CEO "investors really understand Twitter" now I know it's a farce. Patronizing already
Nov 7, 2013 12:44PM
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I remember back in the 90's when the "event" was the FED lowering interest rates. We would all wait in anticipation. I remember at the time thinking well what happens when we get to zero? Well here we are. Same thing with this TWIT nonsense. I remember the PALM offering. Some folks had open orders filled at $165. I think it closed the first day at $130 and never did anything but leapfrog down from there.  And they actually made a product.
Nov 7, 2013 2:22PM
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Like we said this morning, futures were up, a small sucker's rally to start the trading day and when scumbags took over, down we went....Twitter was just a distraction while manipulators did their thing steadily....Less than 3 hours to go and although we never give up, we have too many of these crooks on and off the floor....Doesn't look promising...Oh well, we shall see. More after the close.
Nov 7, 2013 4:01PM
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Fatty is making his rounds today.  Like the stray dog watering down every fire hydrant he comes across.  Do you lift the leg or squat Fatty? Bet he squats.

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