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Whole Foods' Stock Price Has Me Dancing in the Aisles

Farnoosh Torabi

Editor's note: Not drowning in debt? Have $1,000 to put to work? TheStreet.com senior correspondent and You're So Money author Farnoosh Torabi follows up "How to Play $1K: Sweet CDs" and "How to Play $1K: Powerful P2P Loans" with a look at Whole Foods.

While it's not advised to mix business with pleasure when it comes to stocks, I can't help but think that my love for Whole Foods (WFMI Quote) is a sign that the stock is a solid long-term investment -- even as it's down more than 50% from its 52-week high.

Oh, how I love pushing my cart down Whole Foods' spacious aisles filled with Kashi and Amy's Kitchen natural products. How I love to greet its all-smile staff and the store's devotion to "green." And while I don't necessarily enjoy the long lines during after-work rush hour, that to me is one sign that the company has devoted organic foodies that will stay by its side during and after this difficult economic period.

Of course, my perspective as a shopper is a bit jaded. I live in New York City, where we don't have to drive around to buy our food. Escalating gas prices are not really stopping us from buying organic lentils, as they are the rest of the country perhaps. Plus, from what I understand, Whole Foods is investing yet again in the Big Apple, opening a new store in my neighborhood on Manhattan's Upper West Side. So business can't be that bad. As the saying goes, if you can make it New York, you can make it anywhere.

In all, Whole Foods has 90 new stores across the country in the pipeline. And let's face it, green will remain the new black (must-own) for not only consumers, but investors, and Whole Foods is a green poster child. "We think over the long run the [Whole Foods] concept is not only viable, it speaks to a lot of trends in terms of where the consumer is heading," says Mitchell Corwin, equity analyst for Morningstar (MORN Quote) in Chicago. "The company has a lot of room for potential growth."

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But not everyone agrees with Corwin. Hence, the following closer look at Whole Foods and why, ultimately, I want to place it in my "How to Play $1K" portfolio. (Note to readers: I am not allowed to invest in individual stocks due to my job at TheStreet.com. Though, in real life, I may buy shares of the Winslow Green Growth Fund (WGGFX Quote), a mutual fund of green and eco-friendly stocks, such as Whole Foods, First Solar (FSLR Quote) and Green Mountain Coffee Roasters (GMCR Quote).)

My Take

To understand why I'm bullish on Whole Foods -- even while the company's latest quarterly report showed a 13% slide in profit, missing Wall Street estimates -- let's examine how the company makes money and how well it's accomplishing its mission, or "Declaration of Interdependence," as it boasts on its Website.

Let's also peek into management, because to be honest, I was a tad concerned after the brouhaha surrounding CEO John Mackey, who was recently cleared by the SEC for sending about 1,400 anonymous Yahoo! (YHOO Quote) postings about Whole Foods' prowess under the screen name "Rahodeb" -- his wife's name spelled backwards. Tricky!

Whole Foods makes money primarily from high margin sales of organic varietals in a booming organic food market in the U.S. This industry is expected to grow $3.5 billion a year and top $30 billion in 2009, according to the Organic Trade Association, with Whole Foods its eminent poster child. Credit Suisse (CS Quote) analyst Edward Kelly writes in his latest report on Whole Foods that "the industry will grow at least in the high single digits for the foreseeable future."

Whole Foods' mission statement, entitled "Whole Foods, Whole People, Whole Planet," promises to provide more than just food. "Our success in fulfilling our vision is measured by customer satisfaction, Team Member excellence and happiness, return on capital investment, improvement in the state of the environment, and local and larger community support," says its Website.

In question right now is Whole Foods' return on capital investment. Its less-than-great acquisition of Wild Oats attributed to a loss of $8.6 million in the second quarter, according to the company's latest earnings filings. Further, its ramp up in store openings -- up to 30 more in 2009 -- has some downside risk and could potentially hurt the stock in the near-term, analysts worry. Credit Suisse, for example, projects Whole Foods' accelerated expansion would stump growth by 8% year-over-year.

For now, as the company builds further out, some are concerned about whether its decentralized model of management -- where every geographic division has its own president and all product sourcing is done locally -- will and can adjust to its larger size. "To manage the new stores coming on-line, Whole Foods may need to look outside the company for experienced people," says Corwin, and aim to become more centralized.

On a positive managerial note, it appears executives are aware of Whole Foods' growing pains, exemplified by its trimming of square footage on some soon-to-built stores. As for Mackey, his message board scandal doesn't threaten the company's future, adds Corwin. "That speaks to something other than the execution of the business," he says. "Whole Foods has a deep understanding of the culture that's different from its peers."

What the Critics Say

Food and gas prices are soaring, consumer wallets are getting wacked and all the while the organic super-grocer's stock is in the dumps -- currently trading near its 52-week low at around $26 per share. Its year-long high was reached back in October 2007, hitting $53.65 per share. Since then the stock's lost about half its value on a drop in consumer spending, growing competition from lower-priced rivals like Wal-Mart (WMT Quote) and Safeway (SWY Quote), massive spending on expansion efforts, and the high costs to integrate the more than 100 Wild Oats chains it acquired back in 2007. Goldman Sachs (GS Quote) analyst Simeon Gutman cut his price target from $45 to $39 per share, describing the business as "in transition."

But if there's anything I've learned from working at TheStreet.com and listening to our co-founder Jim Cramer give advice on TheStreet.com TV's "Wall Street Confidential," it's that you want to buy a stock that you believe has growth potential, when it seems everyone is bearish on it. So for all the reasons I've stated (and more), I think buying 35 shares of Whole Foods is a good long term investment of just-under a grand.

Call me a value-orientated gal, but I want a stock that, in the next 10 or 15 years might help pay for a brand, new car - a hybrid, of course. Analysts argue that Whole Foods, despite being beaten down over the past year, is not a cheap stock. "We say the stock is trading at 21 times our 2008 numbers and still 16 times our '09 numbers," says Lehman Brothers (LEH Quote) analyst Meredith Adler. "Yes, it's growth. But how long will it last?" Adler says if she were really shopping for growth, she would rather pick growth companies CVS Caremark (CVS Quote) and Dollar Tree (DLR Quote).

Adler might be right. But while I understand Whole Foods' current price-to-earnings ratio of 23 is not as impressive as some other growth stocks, I'm still stuck on the darn stock.

And as I think out loud here, I have to say it's got equally, if not a bit more, to do with my belief in the green revolution, as it does with the company's growth prospects. I view Whole Foods as a buy-and-hold pick that makes me feel like I'm doing something deliberately eco-friendly -- a proud attempt to mix business with conscious.

What Do You Think?

Whether to invest in Whole Foods opens up a forum of discussion and debate, which I'm more than happy to moderate. Please send me your thoughts on whether the stock can hold up to its promise to shareholders and whether the organic trend in this country can support Whole Foods' relatively high product prices.

With margins so low in the grocery world, what other grocery stocks are poised to outperform Whole Foods? Or, what better 52-week low stocks are worth investing $1,000 in? Finally, is Whole Foods really a value stock?