Play the sell-off with Whole Foods

You can use the market's weakness to look at stocks that are doing well but have simply become too expensive.

By Jim Cramer Nov 9, 2012 9:48AM

ImageSource PictureQuestTheStreet LoGo

How do you use a sell-off? I've got a ton of methodologies.

 

You can go back to stocks of companies that have done well and got hammered anyway. You can decide to start picking at stocks you have been waiting for to come down, the preferred way of Action Alerts PLUS. But the one I want to focus on this morning is to look at stocks of companies that are doing terrifically but that simply got too expensive.

 

Consider the case of Whole Foods (WFM). Here's a company that reported 8.3% comparable sales numbers, one of the highest of all the companies I follow. It has a huge growth path as it only has 342 stores with the ability to have as many as 1,000 before it starts cannibalizing itself. It remains a revered institution with a good housekeeping seal of approval aspect that amazes while at the same time it has been able to close the price gap between "regular" supermarkets and itself to the lowest level since it came public.

 

Best of all, it is spewing cash and has the least-stretched balance sheet in the business, one that allowed the board to raise its dividend to 20 cents from 14 cents and to continue to buy back shares.

 

There's only one problem: it sells at 31 times earnings. In this environment, where people are selling anything that's not nailed down -- where Whole Foods represents a huge capital gain and therefore a giant tax hit next year if nothing is done about the fiscal cliff -- Whole Foods becomes Public Enemy No. 1 for the taxable investor. There's just too much gain NOT to take.

 So what do you do? You figure out, OK, where would Whole Foods be a gift? At what price would a 15% grower that can grow for years and years be regarded as cheap? What would you pay for the roughly $3.00 that the company can earn next calendar year?

 

To me, an ideal price might be 25 times earnings. You are not going to get a quality company like this on the cheap -- not one with this reputation, this management and this balance sheet.

 

I think anything more than 25 times earnings, or $75 a share, you take a pass. Remember, this is how you use a sale, not how you let it use you. Plus, when it gets to $75, I wouldn't even put on a full position. Much better to buy half and then wait, say, until it sells at 22 times earnings to buy more, and then 20 times earnings to buy the rest.

 

Sure, if the growth rate suddenly slows, you are going to lose a lot of money. But you will be buying it at a cheap rate historically and that's the correct prism for higher-growth investing.

 

You can do this exercise with a whole bunch of companies. I am only picking on Whole Foods because the quarter was everything you could ever want out of a company except for one that is so expensive that nothing could ever be enough.

 

Jim Cramer's Face

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned.

 

 

 

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22Comments
Nov 9, 2012 8:07PM
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Jimmy this is off your subject , but it does pertain to your program aired 11-9- 12 , When you had your little Cadets explain why they chose there goals, half were bsing ,security and easy money for life supplied by the american tax payer should be half or 3\4 of the truth ,America can't flip the bill, and passing along a dept is not responsible. Most military personal are blood sucking the Average joe blow American   like teachers and all goverment employes . Most get fat and lazy . I know the truth hurts
Nov 9, 2012 5:51PM
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I hear all these people crying about the fiscal cliff.Do I have to tell everybody what is

going to happen?The Pres and the congress is going to reach a compromise that

nobody really likes.It will happen about Dec.18th.Congress is not going to miss their

Christmas vacation.They will extend a few tax breaks and pat themselves on the back

we can all sleep for now.Just laugh when somebody says "THE SKY IS FALLING".

Nov 9, 2012 4:42PM
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I've done well using the 7 times earnings guideline (among others).

 

 

Nov 9, 2012 2:02PM
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Tumble brain I don't get your logic........ If Obama holds a hard line when he speaks stocks should go down if they really were going down due to worry over the fiscal cliff....... If he seems willing to compromise you won't be happy either.......... what an idiot.
Nov 9, 2012 1:22PM
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Consumer Confidence at a 5 year high ?   More "BS" from the spin masters !  10 million homes are underwater another 20 million homes in some form of default or foreclosure or in the Banking Cartel Shadow inventory.  ! Unemployment if you don't cook the books is at 22%. But Consumer Confidence is high ! All is well the government will take care of us ! Take your hard earned money out of FRAUD STREET before you lose it !
Nov 9, 2012 1:03PM
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 Dlh 244!8! PLEASE give me your stock picks so I can SHORT them!
Nov 9, 2012 12:58PM
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 Hey dlh.2448! Speaking of STUPID aren't you the IDIOT who predicted Mitt would carry every swing state but NV?? That being the case, stay away from THIS dude's advice, his logic skills are obviously crap. .If dlh 2448 say sell it's time to buy
Nov 9, 2012 12:49PM
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 Why would people stay with Face Book is someone offered the same thing for say $5 a month, no ads and privacy guaranteed. It was the model Sirius used
Nov 9, 2012 12:46PM
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This mini-crash is fueled by what is known as "sand-bagging." The high roller day traders pulled some of their collective chips out of the pot, but have no intention of cashing them in, or getting dealt out of the next hand since the Market is the only game in town (especially for the 1%).

 
Nov 9, 2012 12:45PM
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 You could have made good money at least four times if you had played FB's dead cat bounces right. I bet some Chartists did
Nov 9, 2012 12:35PM
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 The Fiscal Cliff solution is simple. LET the result of their gridlock intransigence happen. You WANTED tax hikes , you got it. You WANTED spending cuts you got it. What is good for Europe is good for the US

 THEN craft NEW spending and tax cut bills that are VERY specific in nature and dare each other to turn them down.One tax cut bill SPECIFICALLY for the Middle Class and a SEPARATE tax cut bill for the Upper class

 One pending bill  JUST for Defense and a separate one for medicare. 

 ITEMIZE prorities don't bundle them. Far more likely to reach agreement that way
Nov 9, 2012 11:35AM
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Jimmy you need to mention fiscal cliff , and compitulation a few more times a day along with your other buddy  guru's that work for cnbc .   
Nov 9, 2012 11:19AM
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Don"t play Wall Streets game!! You wont win on company earnings because its not about earning anymore. Wall Street is only rumor driven and you lose no matter what a company does. Buy farmground!!!
Nov 9, 2012 11:15AM
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What most politicians can't figure out is that a whole lot of the upper 5% are a) losing or making very little money on investments b) building the nest egg in deferred accounts or c) refusing to invest new monies into businesses or stocks.

 

If we had a 90% tax rate on earnings over $1 million would it eliminate the deficit?

 

I don't think so. Anyone have the numbers?

 

I don't believe we can tax our way out of this hole. By the way, isn't Obama a member of the 1%?

Nov 9, 2012 10:57AM
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Hey cramer - your FB call at $24 is looking pretty shabby ....I am wondering why all your staff keep pumping this one - your other writer rocco endola is always pumping it up ----- you made money for me as I have PUTS but seriously you are costing people money with your dart board advice !!

Keep up the bad work !
Nov 9, 2012 10:50AM
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This is the gift horse buying opportunity.I`m buying big time.In a few weeks the Dow will

be up to all time highs and you`ll be kicking yourself for not buying now.Get over the

election, it`s time to BUY!

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Cramer you should never never pay more than 7 times earnings for a company stock

 

at least back in the normal days when people did not lose everything they had in the market that is what they told people.

 

25 times earnings is more than 3 times what you should pay for a stock.

 

The stock market is totally in a bubble folks

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