Whole Foods Market Inc. (WFMI)
The recent concern over pesticide and human generated hormones in our food has sparked great interest in specialized grocery stores such as Whole Foods (WFMI). Whole Foods of course specialize in selling organically grown food. In the last five years, Whole Foods have enjoyed a nice growth. In 2002, WFMI was trading at around $15 per share. The stock split in 2006 and is now trading in the mid $50 range. All in all, this stock has performed well.
Whole Foods reminds me of Starbucks (SBUX). Both companies serves a specialize market and has been dominant in their respective niches. As Starbucks (SBUX) is for coffee, people often equate organic food with Whole Foods (WFMI). These two companies have achieved a status I call “consumer monopoly”.
While this is all good, I am reluctant to recommend buying WFMI given the extremely high expectation. This company is currently trading with a P/E ratio of 47. To see why P/E ratio matters, see Homework Matters. For a company that is growing at 15-20% year over year, by all account, this stock is very expensive. I’m not implying WFMI does not deserve its high valuation; just that it is a riskier investment than most.
The main concern with stocks which trades at high multiples is it could easily sell off if expectations are not exceeded. For instance, Whole Foods better post a great quarterly report to maintain the momentum. Furthermore, guidance will need to be above and beyond analyst expectation on November 8, 2006 when it reports. If they fail to impress, expect this stock will take a big hit.
My target entry price for WFMI is $45/share. I believed if one can obtain WFMI at $45/share, the potential reward would outweigh the risk. If it happens, then great, but if it doesn’t, my congratulation to the current shareholders!
