Organic food may be good for the body, but not so much for the portfolio. Long-term investors of Whole Foods Market, Inc. (NASDAQ:WFM) are all too familiar with the color red. Unfortunately, 2016 wasn’t much different. Although gentle by its own standards, WFM stock still lost 6% after gyrating through a series of undulations. With that in mind, will the markets finally turn around for Whole Foods?
The last time WFM stock ended up positive for the year was in 2013, when it hauled in nearly 27% in profits. That seems like an eon ago.
Since then, it has been nothing but ugly. There is a common assumption that the pain can only last for so long. Granted, three consecutive years of red ink does seem a tad overdone. Despite the challenges, Whole Foods is a marquee name among grocers. If anybody can pull off a rebound in the sector, it’s WFM.
Then again, we also have to look at reality. Whether it’s President Donald Trump’s economic policy and general demeanor, or the persistently strong dollar that ends up pinching profits, WFM stock isn’t well situated. The broader competition for Whole Foods — Sprouts Farmers Market Inc (NASDAQ:SFM), Kroger Co (NYSE:KR) and Supervalu Inc. (NYSE:SVU), to name but a few — have posted horrible market performances. If Wall Street is hating the sector, I can’t see why they would exempt WFM stock.
Still, I don’t want to play negative Nancy for its own sake. And there are some intriguing factors to consider if you want to be (extremely) speculative.
Solid Tailwinds for WFM stock
First and foremost, Whole Foods is both pioneer and frontrunner in the organic grocery space. It had the advantage of defining the organic subsector in its infancy. Through clever marketing such as those focusing on female shoppers, WFM became the entity it is today. Whole Foods is also one of the most admired companies and one that employees love to work for.
This segues into the present health and wellness culture. As InvestorPlace writer Tom Taulli points out, research conducted by TechSci indicates that organic food is a $45 billion market in the U.S. Plus, it’s growing at a clip rate that should continue for the next four years. On top of all that, fitness center memberships have been rising. Not only do people want to take care of themselves, they’re putting money where their mouth is. That’s certainly a tailwind for WFM stock.
Finally, you can look at the most obvious selling point. A play on Whole Foods is a bet on a fundamentally secular industry. No matter what happens in the markets or the economy, people will have to eat. Given the trends we’re witnessing, shoppers will be cheap — to an extent. After a while, one-dollar beans gets old, hence the bull case for WFM stock.
While these are solid contrarian arguments, will they be enough for investors to gamble on Whole Foods? Here, I think we have to look at things realistically.
Whole Foods Is Up Against a Stacked Deck
No matter how great of an opportunity WFM stock may be, it’s facing a severe hurricane that it can’t do anything about.
With the greenback still elevated near record levels, it’s going to be tough to stay in the black. Grocery stores are already margin-sensitive businesses, and the resultant food price deflation is a killer.
From milk to iceberg lettuce and pork chops, seemingly everything is on a fire sale.
The other big issue is competition. Several of Whole Foods’ rivals are desperate and hungry — not a good combination.
They also read off like a “who’s who” of companies you don’t want to mess with: Wal-Mart Stores Inc (NYSE:WMT), Target Corporation (NYSE:TGT) and Costco Wholesale Corporation (NASDAQ:COST). I don’t even want to get into Amazon.com, Inc’s (NASDAQ:AMZN) foray into groceries. I tell it like it is — I don’t need to be a sadomasochist.
But what really bothers me about WFM stock is the lack of enthusiasm in the sector overall. Sprouts Farmers Market dropped 26% last year. Kroger was slightly more palatable — if you want to use that term — at a 20% loss. As for the big box retailers, Target looks like it’s puking its brains out and Walmart is rushing for the nearest restroom to do the same thing.
Sorry for the imagery. But I think we have to consider what the strategy for Whole Foods stock would be. Sure, it’s an excellent company, but excellence by itself isn’t necessarily profitable. Until WFM stock can do more than ping-pong in a horizontal channel, it’s best to stay away.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.