NEW YORK (TheStreet) - Aren't we seeing continued long-term trend of anti-obesity plays? Health food, organic food and beyond are in for the long-term. This was a big theme in Get Rich Carefully. So have you been scratching your head about the almost-20% decline in Whole Foods (WFM) yesterday to the high $30s, not to mention the long decline since it stood at over $60 back in November.
Whole Foods has historically been a great operator. But at these levels, even AFTER all of these declines, the stock is STILL trading at 25x P/E. With comps at 4.5% last quarter--another deceleration-- that is still, yes still, pricey. And speaking of pricey, Whole Foods has been "investing in price"-- a fancier way of saying lowering some of its prices-- in order to attract new customers and increase demand from existing customers. But Whole Foods' core customer is higher end and this hasn't translated. Ultimately, what we have here is a competition problem. Not only do we have more health food names growing-- like Sprouts Farmers Marekt (SFM), The Fresh Market (TFM), Fairway (FWM) and beyond. But we also have traditional supermarkets like Kroger (KR)rolling out more organic products. And even mass retailers like Wal-mart (WMT) are focusing on organic products. All of this is not a good combination as Whole Foods is beefing up its store grwoth.
Now, in terms of fundamental growth in the health food supermarket space, Sprouts Farmers Market is uniquely well positioned. Why? Because (1) It is a value-oriented company, targeting more of the middle income consumer versus the higher income demographic of Whole Foods. And (2) Higher store growth potential, from 160 stores currently to 1200 longer-term, which gives it a bit more 'growth junior' status relative to Whole Foods. However, I STILL wouldn't buy this one right here, even after the strong quarter. Its steep valuation, even after the momentum sell-off, puts it at risk in this sort of market, there is an Apollo ownership overhang, and creeping competition remains an issue.