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I’m always skeptical when it comes to market participants declaring a new paradigm.
The dot-com bubble is a prime example, but there are others too.
Like Whole Foods Market (NASDAQ: WFM).
Have you ever heard anything more ludicrous than the promises of those early believers? Whole Foods was going to change the way groceries were bought and sold.
Consumers craving a natural approach to food would ensure parabolic growth for as long and far as the eye could see.
Perhaps those folks need to eat more organic carrots, because it’s not happening.
Ah, but they had you going for a fair while, didn’t they? Right up until last fall, this was a stock that could do no wrong. Its shares peaked at $65 per share trading at a premium valuation.
Then the bubble popped and the fun ended.
The woe continues Thursday. Shares are in a free-fall after the company’s earnings report following Wednesday ‘s close. Whole Foods said it made 42 cents per share in the quarter ending Dec. 31, 2013. That was 2 cents per share below forecasts. Revenues of $4.24 billion were also below the expected $4.29 billion. In addition, Whole Foods lowered the top end of its revenue guidance. The range on earnings for the full year was also reduced.
That was enough to keep the selling pressure on this high-priced stock.
In this market you need to deliver a pristine report or look out below. That’s what’s happening here to the tune of about 7% on the downside.
Are you really surprised by the move?
We are talking about groceries here. I couldn’t care less if the food came from heaven itself. From a business perspective, you are dealing with a razor-thin margin business — period.
Organic or not, it is still just groceries.
It’s taken much longer for this bubble to pop, but that’s how these things tend to go.
Competition for the grocery dollar is fierce. The idea that Whole Foods’ ability to charge higher prices is simply not sustainable. That is especially true in this very challenging economic environment for consumers.
Analysts expect Whole Foods to grow profits by 17% from the current fiscal year to the next. At current prices including the 7% decline on Thursday, shares trade for 31 times current fiscal year estimated earnings.
Love this stock all you want, but the numbers ultimately matter. Valuation decompression here is likely to continue until this thing is more reasonably priced relative to reality.
I’d sell this stock and look for opportunity elsewhere.
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