Whole Foods: Why WFM Stock Is Still a Sell

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I’ve mentioned a few times of late an investing lesson that took me a little while to fully learn and apply: Just because a stock has taken a beating doesn’t mean it’s a bargain, and just because it’s gained 200% doesn’t mean it can’t keep going.

Whole Foods: Why WFM Stock Is Still a SellThis was confirmed this week when Whole Foods Market (WFM) reported earnings.

Before the report, WFM stock had already suffered an ugly decline. Unfortunately, the earnings report simply confirmed concerns around the organic grocery chain and led to even more investors rushing for the exits.

Between takeover rumors and the continued downslide, it could have been (or still may be) tempting to call WFM stock a bargain and go bottom-fishing. And sure, Whole Foods stock is cheap relative to its historical price-to-earnings multiple.

But it’s cheap for a reason.

The Problems for WFM Stock

In a nutshell, that reason is that growth is slowing dramatically.

Once again, the most recent quarter was proof. For starters, Whole Foods posted a substantial earnings miss, which was the second straight quarter during which results fell short of expectations. Sales expanded 6% year-over-year to tally $3.4 billion in sales, which trickled down to adjusted earnings per share of 30 cents. Meanwhile, analysts were expected $3.47 billion in revenue and 34 cents per share in adjusted earnings.

And the worst part is that those misses weren’t even the worst part.

Whole Foods, which has historically posted double-digit same-store sales growth, posted a decline in the important metric. This was the first decline in six years for the company, and came as analysts were expecting a slight expansion.

Shares were down around 2% as a result Wednesday, pushing 2015 losses north of 40%.

Once again, don’t be fooled into thinking this is a bottom.

While the organic foods industry is improving, the fact that Whole Foods was a leader led to froth, overhype and over-expansion.

And now, Whole Foods is facing competition from every direction.

While the company claims it’s not going to get pulled into a price war (as Fortune reported), management did note (as Business Insider reported) that: “We don’t think there’s anything we can do immediately except increase promotional activity to drive sales.”

That will mean thinner margins, which will continue to weigh on earnings.

Sometimes Share Buybacks Are a Bad Thing

Whole Foods also announced a $1 billion share buyback yesterday, which to me reeks of desperation. It shows the company can’t fix things fundamentally and is trying to plump up earnings per share by taking shares off the market.

It’s also trying to lower costs to beef up that bottom line — which will be tough considering its expansion plans and promotional focus.

For the rotten cherry on top, I also care a lot about balance sheets for fundamentals, and WFM announced that prior to the end of the first quarter, it is going to incur additional long-term debt of up to $1 billion.

Add it up, and this simply isn’t the kind of investment you want to make.

Whole Foods, which sports a PEG ratio of 1.51, still looks a bit overpriced despite the beating it has taken. It also doesn’t seem to have any redeeming fundamentals or a legitimate way to turn things around.

Stay away from shares, despite the “discount.”

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/whole-foods-wfm-stock-still-sell/.

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