I'm not going to rub it in, but back in December, I didn't win many friends for advising investors to sell the stock. At the time, the shares traded close to $56. The stock closed Wednesday at $38.93, down 30% since my recommendation.
My caution had nothing to do with Whole Foods' status as a well-run company. Instead, it was because Whole Foods had gotten too good for its own good. The company's name, which became synonymous with health and wellness, had drawn too much competition. The stock had traded on enormous growth expectations. The price-to-earnings ratio then was close to 40. The recent decline has dropped that ratio to 25.
Although Whole Foods was a strong growth producer, it was too risky to ignore how quickly rivals such as The Fresh Market (TFM) and Natural Grocers (NGVC) had grown in a relatively short period of time. And last month, when Walmart (WMT) announced its entry in the organic foods industry, Whole Foods' expiration date drew closer.
The company's fiscal second-quarter earnings report Tuesday confirmed these fears. Earnings of $142 million, or 38 cents per share, were flat. Wall Street was looking for an 8% jump. Even though revenue was up close to 10% to $3.32 billion, it still missed estimates of $3.34 billion.