Whole Foods (WFM) is taking a dive this morning after an ugly fiscal third quarter; shares of WFM stock are down about 7% today as a result.
But miserable Whole Foods earnings are only the beginning. The organic food grocer is down about 37% so far in 2014 with no bottom in sight, making it one of the worst-performing stocks in the S&P 500.
The slowing sales and increased competition at WFM stock are serious signs of concern that mean today’s pain is just part of a larger downtrend, and Whole Foods earnings will continue to suffer.
Here’s why you should sell Whole Foods stock now:
Whole Foods Earnings Details
Whole Foods earnings showed decent profits, with fiscal Q3 profits of 41 cents per share. That topped expectations … however, revenue fell short of forecasts by a hair at $3.38 billion vs. $3.39 billion in forecasts.
That doesn’t sound like a big miss on sales, and admittedly WFM beat on the top line. However, Whole Foods has been a dog this year, and investors really aren’t willing to give the company the benefit of the doubt.
The organic grocer’s decline started in earnest back in November, when Whole Foods lowered its sales and profit outlook for fiscal 2014. WFM stock had a forward price-to-earnings ratio of around 40 at the time, and the Whole Foods earnings multiple coupled with lowered expectations didn’t sit well with investors. After that, Whole Foods cut its outlook again in February, then again in May.
The fact that Whole Foods is having trouble even hitting that weaker guidance is not a good thing.
Sell WFM Stock
There are those who think that this could be a great buying opportunity after the flop, now that valuations are a bit more reasonable with the forward P/E on WFM back to around 21.
However, Whole Foods still is exorbitantly overpriced compared with other grocers. Kroger (KR) and SuperValu (SVU) both have a forward P/E of about 14.
Furthermore, competition in the organics space is fierce both from direct upscale competitors like privately held Trader Joe’s and recently public Sprouts Farmers Market (SFM) as well as conventional grocery stores like Walmart (WMT) that are pushing into organics with earnest.
The problem for Whole Foods is that the valuation still is stretched, expectations were unfairly high and competition is fierce.
Despite the fact that WFM stock is still up 200% in the past five years even after this recent flop, investors would be wise to move on to greener pastures as soon as possible.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
