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Health Stocks: Are Premium Grocers and Others Worth a Buy?

WFM and other health stocks are taking a beating, but don't try to catch the falling knives

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Health Stocks — Premium Grocers

whole-foods-wfm-stockLet’s take a look, starting with premium grocers. I wrote about Whole Foods recently, noting that groceries are a rotten business. The business of selling food and basic staples is brutally competitive and tends to have modest margins. There is one big exception, however: Premium or specialty grocers such as Whole Foods, Trader Joe’s or HEB’s Central Market.

These stores — which often offer organic options and more exotic international or craft fare — have had tremendous success in recent years.  Whole Foods — the only publicly traded upscale grocer of any size or scale — is also the only grocer that can compete with Walmart (WMT) in terms of profitability (see my previous article).

The rise of premium grocers is backed by overlapping macro trends that should have years — if not decades — left to run.

Let’s start with the elephant in the room: the aging of America’s Baby Boomers. As a generation, the Baby Boomers have been getting progressively pickier in their dietary choices over the past 30 years as the exigencies of age have forced them to take better care of themselves.

Don’t underestimate Generation X, either. Generation X’s preferences have been the driven force behind the internationalization of American food and for the trendy fusion restaurants that crop up in chic neighborhoods like weeds. The Millennials are starting to make their preferences felt as well, and — like Generation X — they have tended to gravitate towards premium foods to the extent that they can afford them at this stage of their lives.

And finally, you have the issue of rising incomes. For the educated and upwardly mobile — the demographic groups that tend to flock to premium and organic grocers — life in America has never been better. The unemployment rate is only about 4% for Americans with a college degree, and the figure drops to just 2.3% for those with a professional degree.

All of this points to a rosy picture for premium grocery chains. Yet the stock performancee paint a very different picture. Compare the performance of publicly traded premium grocers — Whole Foods, Sprouts Farmers Market (SFM), The Fresh Market (TFM), and Fairway Group Holdings (FWM) — against that of the ultimate common-man’s grocer, Walmart. Since last October, Walmart is the only grocer stock that hasn’t seen substantial declines. What gives? I have one word for you: valuation.

Company Ticker Trailing P/E Forward P/E Price/Sales
Whole Foods Market WFM 32.1 25.2 1.36
Sprouts Farmers Market SFM 91.7 41.9 2.05
The Fresh Market TFM 32.7 18.4 1.1
Fairway Group Holdings FWM N/A N/A 0.42
Walmart WMT 16.0 13.5 0.52

Looking at the price/sales ratio, Whole Foods is almost three times as expensive as Walmart — yes, Walmart, the most successful retailer in history. Sprouts is nearly four times as expensive. The Fresh Market and Fairway are a little more reasonably priced, but they’re far smaller and off the radar for a lot of investors.

So, is the foul odor coming from the produce sector just another manifestation of the momentum stock rout? The high-fliers of the past year have had high-profile faceplants during the past six weeks, with many posting double-digit price declines since the beginning of March.

After the recent declines, are the specialty grocers a buy?

No, or at least not yet. The macro trends are durable and real; of this I have little doubt. But it comes back to the economics of the grocery business. Mainstream grocers have not sat idly while the Whole Foods and Trader Joes of the world have poached their customers. Safeway (SWY), Kroger (KR) and even Walmart have expanded their premium and organic offerings in recent years. And while premium grocers can charge more for their products, this ability has limits. Grocery shoppers tend to be a demanding and fickle lot.

Article printed from InvestorPlace Media,

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