This whole investing game is quite easy and predictable.
A hot new company goes public, attracts investors and its stock goes through the roof. Everyone wants all-in until the price reaches an unsustainable level, and then the selling begins.
Eventually either the hot company crashes and burns, or recovers to provide more rational returns in the future.
Whole Foods Market (NASDAQ: WFMI) is a great example of this evolution.
Five years ago, this alternative grocery store was all the rage. The stock appreciated as investors believed that shoppers would be more than willing to part with more dollars in order to get food that was naturally raised without chemicals and pesticides.
At the point of mass interest, the stock hit a high of approximately $80 per share in early 2006. That spring, I made the stock one of my short recommendations.
Sure enough, the company hit a wall as competitors increased their own organic selections at a lower price and consumers were beginning to feel strapped. The combination was disastrous to the growth plans for WFMI.
During the ensuing years, investors abandoned WFMI as the dream of unlimited growth faded. Imagine that -- a hot growth story lost its momentum. Like I said, it happens a lot, and it certainly happened here.
The credit crisis and economic recession that began in late 2007 was the nail in the coffin. WFMI shares collapsed to trade below $10 per share. The low was just above $7 in late November.
Today shares are back above $11 per share. Have we reached a bottom at Whole Foods?
I think so. Like the buying at the end of the cycle a few years ago, the selling of late appears to have gone too far. The company may not be growing as it was in the past, but it is making money.
Analysts expect earnings to hit 65 cents per share for the year ending September 2009. WFMI made more than $1 per share in fiscal year 2008. In other words, the haircut has been taken.
I look for the company to return to growth in 2010.
Look at the recent peanut butter scare. Can you trust the food production and distribution in this country? Wouldn't you pay more for organically produced food?
I would and I think others will, too. From the 65-cent floor in earnings, double-digit growth during any recovery is not out of the question.
I like the stock at these levels.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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Reader Comments (Page 1 of 1)
2-10-2009 @ 5:11AM
al coholic said...
Instead of paying the ridiculously high prices at Whole Foods, a better strategy is the one our Grandparents used during the last depression. Grow as much as you can yourself and eat foods that are in season whenever possible. That allows you to buy from local farmers at a farmers mart where prices are down to earth and the growers are your neighbors and have a stake in not poisoning you.
I don't trust long distance farmers (even the ones at WFMI) any more than I trust long distance bankers.
2-10-2009 @ 12:16PM
bob smith said...
Unless I have been reading the govern-
ment reports wrong, I see in the last few years that fewer farmers are converting their land to organic farming. Any expansion at Whole Foods will increasingly come from foreign products. I would trust the European organic food, but Asian and South America is a different story. Though its a great way to make more money using foreign foods.
using cheaper foreign foods