Has Whole Foods Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Whole Foods (NAS: WFM) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Whole Foods.


What We Want to See


Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%12.5%Fail
 1-Year Revenue Growth > 12%12.0%Pass
MarginsGross Margin > 35%35.0%Pass
 Net Margin > 15%3.5%Fail
Balance SheetDebt to Equity < 50%0.6%Pass
 Current Ratio > 1.31.87Pass
OpportunitiesReturn on Equity > 15%13.1%Fail
ValuationNormalized P/E < 2039.76Fail
DividendsCurrent Yield > 2%0.7%Fail
 5-Year Dividend Growth > 10%(6.9%)Fail
 Total Score 4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Whole Foods last year, the company has seen its score rise by a point. The tiniest of gains in gross margins were enough to boost the grocery chain to a four-point showing, but investors have to pay up for Whole Foods' green-friendliness despite growth rates that don't seem to justify the stock's valuation.

Whole Foods has one of the strongest reputations for social responsibility among corporations worldwide. With commitments to energy efficiency, recycling, and providing information to concerned customers, Whole Foods both fulfills its own mission and ensures that its suppliers stay in line as well.

The big question going forward, however, is whether Whole Foods can keep growing at its quick pace. The company saw earnings growth stay strong at 39% in fiscal 2011, continuing its rebound from the recession and far outpacing revenue gains. That's in stark contrast to conventional grocers, with Safeway (NYS: SWY) having struggled merely to keep net income flat.

One area where Whole Foods could look for growth is in overseas markets. Yet while Wal-Mart (NYS: WMT) has become a worldwide name in retail generally, grocery-focused competitors SUPERVALU (NYS: SVU) and Kroger (NYS: KR) are entirely contained within the U.S., and grocery chains have tended to stay close to home rather than seeking to become global powerhouses.

As long as organic foods remain popular in the U.S., Whole Foods has carved out a seemingly impenetrable niche. Given the grocery industry's economics, Whole Foods may never become a perfect stock, but continued growth could help it keep improving in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Whole Foods and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Whole Foods, as well as buying calls on SUPERVALU and creating a diagonal call position on Wal-Mart. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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