Whole Foods seems pricey

Sometimes a stock has everything you want but is not a bargain

By Jim Van Meerten Jul 26, 2011 5:52PM
Right now my Wall Street Survivor portfolio is full but each week I still look to see what I'd buy if I had some cash.  I'd advice you not to take others' buy/sell recommendations unless you've studied how that person invests and your investment philosophy meshes with theirs.

I'm 64 years old and have already accumulated a large portfolio.  I want to keep what I've got but still need growth to beat future taxes, inflation and whatever other uncertainties that may be thrown up for me to cope with by either the economy or politicians.

Some of my readers have complained  that my articles are "cookie cutter" but I take that as a complement because I want all my stock to have he same attributes.  I want to know the same information about any potential investment and pass on any that don't meet all my criteria.  They are:

  • Sales and earnings growth projections should be for double digit increases
  • I need instant gratification so I want to see current positive price momentum
  • The stock has to have a wide and positive following by both the professional and individual investing community
  • There needs to be enough published information on this company because I invest in established companies by looking at the numbers.
  • I do not invest in start-ups that only have ideas and no sales and profits
Let's look at a high growth darling called Whole Foods Market (WFM) and see if it meets my criteria.

Whole Foods Markets (WFM) came to my attention while screening on Barchart because it has a high technical price movement score and has the kind of chart I like to see:


Whole Foods Markets (WFM) according to a recent press release is the largest purveyor of natural foods in the world. They own and operate the country's largest chain of natural food supermarkets. They are like an old-fashioned neighborhood grocery store, an organic farmer's market, a European bakery, a New York deli, and a modern supermarket all rolled into one!

I visited a few of their stores myself and found them to be clean and have the variety  and quality of foods my wife and I enjoy but they may be a little pricey if I was feeding a family of 8.

Let's look at some of the factors I think you should consider:

Barchart technical indicators:
  • 88% Barchart overall technical buy signal
  • Trend Spotter technical buy signal
  • Trading above its 20, 50 and 100 day moving averages
  • 11 new highs and up 11.53% in the last month
  • Relative Strength Index of 69.08% that is still rising
  • Trades around 67.47 which is above its 50 day moving average of 61.01
Fundamental factors:
  • Even though this is a grocery stock most of the Wall Street brokerage analysts following the stock consider it a growth stock
  • The company currently has 297 locations and wants to eventually have over 1,000 stores
  • Analysts have issued 5 strong buy, 6 buy, 11 hold and 2 under perform reports on this stock
  • Sales consensus is for an increase of 12.40% this year followed by another 11.70% next year
  • Earnings are estimated to increase by 32.80% this year, 13.20% next year and continue by increases of 17.57% annually for at least 5 years out
  • My concern is the Price/Earnings ratio of 33.5 which is pretty high for a grocery chain and is about twice the P/E ratio of the overall market
General investor sentiment:
  • I like to use Motley Fool as a gauge of what the individual investor is thinking.
  • Of the 4,445 readers of Fool who expressed an opinion 87% think the stock will beat the market
  • The more experienced All Stars are a little more positive and 93% think it will out perform the market
Summary:  Whole Foods (WFM) is a stock that on the surface appears to have it all current price momentum, double digit growth of both sales and earnings projected and has a wide and positive following from the individual and professional investor.  My big caution is that this is a grocery chain selling at a P/E ratio that is twice the market's.  If I bought it for the current price momentum I'd put a real tight stop loss on this one and monitor that P/E ratio closely.

Jim Van Meerten is a Marketocracy Master

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