Innovation is the key to this stock. Trading at a discount, it’s now a value proposition.
Whole Foods (WFM)
from Unconventional Wealth
When you think of expensive, healthy food, you think of one grocery store: Whole Foods (WFM). Within a sector that notoriously comes with a high price tag, Whole Foods still manages to produce sticker shock. But Whole Foods also has a powerful brand. If something is on the shelves there, customers know it’s trustworthy.
So it’s no surprise that in a sector famous for razor-thin margins, Whole Foods enjoys a 4% profit margin. That’s nearly twice the profit margin of The Fresh Market, another organic grocery store, and nearly four times the margin of Kroger’s, a traditional chain.
In many ways, it makes sense to think of Whole Foods as the Apple of grocery stores. It’s expensive, but it has the sort of reputation and quality for which folks are willing to pay. It has cornered the luxury market.
Whole Foods is also an early innovator. Right now, Whole Foods stores around the nation are undergoing a massive shift. Its bulk section is transitioning away from anything pre-made or pre-mixed. Instead, it’s selling pure ingredients, raw. You can go into new or updated Whole Foods now and find every type of flour you’ve ever imagined or lentils in a stunning variety of flavors and colors.
It’s making this transition because its customers want more control over what they eat—which often means cooking for themselves, from scratch. And it comes with the bonus of providing a cheaper, wholesale option for more price-conscious buyers, without cutting into profit margins. Wholesale grains can be sold at a very affordable price yet still come with a healthy markup.
So you could say, while Whole Foods takes much after Apple, it’s got a little Costco in its DNA as well.
But that isn’t the only innovation Whole Foods is pursuing right now. It’s also teamed up with Instacart to offer grocery delivery in 15 cities, with more to follow. This aggressive innovation across a number of fields is paying dividends. Whole Foods saw revenue increase over 10% last quarter. And that was a slow one—Whole Foods has averaged 27% growth every year for the last five. What’s more, while the stock is far from cheap on a P/E basis, it has come down substantially in price over the last few months. We’ve now got a very attractive entry point.
As an added bonus, Whole Foods also offers a 1.3% dividend on its stock. Buy Whole Foods up to $45.
Ryan Cole, Unconventional Wealth, www.contrarianprofits.com/contact-us/, 888-811-9492, November 2014