Why investors should avoid Whole Foods

Once-loyal, left-leaning patrons are now reportedly calling for a Whole Foods boycott.

By MSN Money Aug 18, 2009 5:25PM

This article was written by Minyanville's Josh Lipton


This morning, longtime market pro Dennis Gartman weighed in with his views on the current Whole Foods boycott and controversy: “People who will go to a store wearing Birkenstocks and socks will take almost any outlandish position, and they’ve taken a position opposed to [CEO John Mackey’s] editorial in The Wall Street Journal last week that took Obamacare to task,” Gartman wrote. “When your own supporters are willing to abandon you, who will support you? It seems like a good question.”


In his outrage-provoking WSJ piece, Mackey called for a move toward “less government control and more individual empowerment” rather than “a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us much closer to a government takeover of our health-care system.”

Unsurprisingly, not all of Mackey’s Prius (TM)-driving customers agree with his views -- and some of those once-loyal, left-leaning patrons are now reportedly calling for a Whole Foods boycott on social networking sites like Twitter and Facebook.


Of course, Mackey's certainly managed to alienate them before: see CEOs Gone Wild: John Mackey for more. Investors should boycott Whole Foods shares, but not because of its stance on health care reform.

But the question isn't whether or not you should shop at Whole Foods (See, "Outpacing Whole Foods Means Not Charging Whole Paycheck." )-- it's whether or not you should dump the stock.


S&P equity analyst Joseph Agnese thinks you should avoid Whole Foods like a carton of spoiled milk. Agnese, who currently has a “Sell” rating on the company, says food retailer is now just looking too pricey, says the analyst.

“It is a great company but the valuation isn’t matching what the growth will be,” Agnese tells Minyanville.


Indeed, Whole Foods shares have surged 190% in the past 6 months, and it now looks expensive relative to its expected earnings power, with a price/earnings to growth ratio of 2.13. (Anything under one is considered a good deal.)


Looking ahead, Agnese sees problems for the company, as spendthrift consumers coming out of this recession save more and spend less, which will keep a lid on the sales growth at Whole Foods, he argues. In the third quarter, the food retailer said sales edged up 2% while sales at stores open at least a year slipped 2.5%.


“People aren’t trading up like they used to and they will be slow to return to that type of behavior,” the analyst says.

Where's the stock headed from here? Katie Stockton, chief market technician at MKM Partners, says Whole Foods is poised to fill its gap down to $24.87, at a minimum, as the market pulls back.


For those stock pickers that are still interested in playing with the grocers in general, Agnese does offer some suggestions. Broadly speaking, he likes those retailers targeting cheapskate shoppers such as Kroger (KR), which he rates a “Buy,” with a price target of $25.


“Those who differentiate to the higher end aren’t as well positioned as those who cater to more price-sensitive customers,” says the analyst.


And now those customers have another reason to avoid the overpriced organic foods lining the pristine shelves of their neighborhood Whole Foods: the CEO's politics.


Of course, boycotts are difficult to orchestrate and research analysts covering Whole Foods don’t see the threats as posing any kind of real cause for concern for the company. Frankly, it’s hard to see how these shoppers could really act on their political impulses: If they steer clear of Whole Foods (WFMI) altogether, where else can they go to buy all that organic applesauce?


No positions in stocks mentioned


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